TD Bank 2003 Annual Report Download - page 90

TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Financial Results88
Restructuring costs
Under previous Canadian GAAP, restructuring costs incurred in
respect of an acquired company could be accrued as a liability
provided that a restructuring plan detailing all significant actions
to be taken had been approved by an appropriate level of man-
agement, and significant changes to the plan were not likely.
U.S. GAAP and current Canadian GAAP require that restructuring
costs related to an acquired company be included as a liability in
the allocation of the purchase price, thereby increasing goodwill.
U.S. GAAP and current Canadian GAAP also require that all
restructuring costs be incurred within one year of a restructuring
plan’s approval by management and that all employees to be
involuntarily terminated be notified of their termination benefit
arrangement. In accordance with U.S. GAAP, restructuring costs
of $82 million after-tax have been recognized during fiscal 2003
(2002 – $101 million; 2001 – $188 million). The restructuring
costs under Canadian GAAP amounted to $64 million after-tax
for fiscal 2003 (2002 – nil; 2001 – $138 million).
Loan securitizations
U.S. GAAP and current Canadian GAAP require gains on loan
securitizations to be recognized in income immediately. Under
previous Canadian GAAP, gains were recognized only when
received in cash by the Bank.
During fiscal 2003, the Bank adopted the new U.S. interpreta-
tion on the consolidation of variable interest entities (VIEs) which
is applicable to all VIEs created after January 31, 2003. The inter-
pretation requires the Bank to identify VIEs in which it has an
interest, determine whether it is the primary beneficiary of such
entities and if so, consolidate them. A VIE is an entity that either
lacks sufficient equity to carry on principal operations without
additional subordinated financial support from other parties, or
has equity holders unable to make decisions about the entities’
activities or has equity holders who do not absorb losses nor
receive benefits of the entities’ activities. As a result of imple-
menting this U.S. interpretation in fiscal 2003, certain VIEs have
been consolidated with total assets of $195 million. In addition,
during fiscal 2001, the Bank adopted the U.S. accounting
standard for transfers and servicing of financial assets and
extinguishments of liabilities. The principal impact of this U.S.
standard on the Bank’s financial statements was to require
consolidation of special purpose entities (SPEs) in circumstances
where the SPE is considered a single seller and either its activities
are not sufficiently limited or it does not have a minimum 3%
external equity investment. Canadian GAAP requires consolida-
tion of such entities only when the Bank retains substantially all
the residual risks and rewards of the entity.
Non-controlling interest
Under U.S. GAAP, preferred shares of the Bank’s subsidiary,
TD Mortgage Investment Corporation, are presented as a non-
controlling interest on the Consolidated Balance Sheet, and the
net income applicable to the non-controlling interest is presented
separately on the Consolidated Statement of Operations. Under
Canadian GAAP, these preferred shares are included within the total
preferred shares presented on the Consolidated Balance Sheet.
Future income taxes
Under Canadian GAAP, the effects of income tax rate reductions
are recorded when considered substantively enacted. Under U.S.
GAAP, the effects of rate changes do not impact the measure-
ment of tax balances until passed into law.
Investment securities
U.S. GAAP requires that investment securities be classified as
either “available for sale” or “held to maturity”, and requires
available for sale securities to be reported on the Consolidated
Balance Sheet at their estimated fair values. Unrealized gains and
losses arising from changes in fair values of available for sale
securities are reported net of income taxes in other comprehen-
sive income. Other than temporary declines in fair value are
recorded by transferring the unrealized loss from other compre-
hensive income to the Consolidated Statement of Operations. For
U.S. GAAP, the Bank accounts for the majority of investment
securities as available for sale. Under Canadian GAAP, investment
securities are carried at cost or amortized cost, with other than
temporary declines in value recognized based upon expected net
realizable values.
In addition, under U.S. GAAP certain non-cash collateral
received in securities lending transactions is recognized as an
asset and a liability is recorded for obligations to return the
collateral. Under Canadian GAAP, non-cash collateral received
as part of a securities lending transaction is not recognized in
the Consolidated Balance Sheet.
Derivative instruments and hedging activities
The Bank adopted the U.S. standard relating to derivative instru-
ments and hedging activities on November 1, 2000 and recorded
a cumulative transition adjustment recognizing after-tax gains of
$10 million in net income and $20 million in other comprehensive
income in fiscal 2001. U.S. GAAP requires all derivative instru-
ments be reported on the Consolidated Balance Sheet at their fair
values, with changes in the fair value for derivatives that are not
hedges reported through the Consolidated Statement of
Operations. U.S. GAAP provides specific guidance on hedge
accounting including the measurement of hedge ineffectiveness,
limitations on hedging strategies and hedging with intercompany
derivatives. For fair value hedges, the Bank is hedging changes in
the fair value of assets, liabilities or firm commitments and
changes in the fair values of the derivative instruments are record-
ed in income. For cash flow hedges, the Bank is hedging the vari-
ability in cash flows related to variable rate assets, liabilities or
forecasted transactions and the effective portion of the changes in
the fair values of the derivative instruments are recorded in other
comprehensive income until the hedged items are recognized in
income. For fiscal 2003, deferred net losses on derivative instru-
ments of $27 million (2002 – $68 million; 2001 – $132 million)
included in other comprehensive income are expected to be
reclassified to earnings during the next 12 months. Cash flow
hedges also include hedges of certain forecasted transactions up
to a maximum of 11 years, although a substantial majority is
under two years. The ineffective portion of hedging derivative
instruments’ changes in fair values are immediately recognized in
income. For fiscal 2003, under U.S. GAAP, the Bank recognized
pre-tax gains (losses) of $(19) million (2002 – $3 million; 2001 –
$13 million) for the ineffective portion of cash flow hedges.
Under Canadian GAAP, the Bank recognizes only derivatives
used in trading activities at fair value on the Consolidated
Balance Sheet, with changes in fair value included in income.
Foreign currency translation adjustments
U.S. GAAP requires foreign currency translation adjustments
arising from subsidiaries where the functional currency is other
than the Canadian dollar to be presented net of taxes in other
comprehensive income. Under Canadian GAAP, the Bank
presents foreign currency translation adjustments as a separate
component of shareholders’ equity.
Guarantees
During the year, the Bank adopted the U.S. interpretation on
guarantor’s accounting and disclosure requirements for guaran-
tees, including indirect guarantees of indebtedness of others. As
a result, for U.S. GAAP purposes, the initial liability for obliga-
tions assumed with respect to guarantees issued or modified
after December 31, 2002 is recorded on the Consolidated
Balance Sheet at fair value. The total amount of the current liabil-
ity recorded on the Consolidated Balance Sheet is $20 million for
U.S. GAAP purposes in 2003. Under Canadian GAAP, a liability is
not recognized at the inception of a guarantee.
Asset retirement obligations
During the year, the Bank prospectively adopted the U.S. standard
relating to accounting for asset retirement obligations. This stan-
dard requires that a liability for an asset retirement obligation
related to a long-lived asset be recognized in the period in which
it is incurred and recorded at fair value. The offset to the liability is
capitalized as part of the carrying amount of the related long-lived
asset. There are no similar requirements under current Canadian
GAAP. The cumulative effect of the change in accounting policy
on prior years was a charge to income of $15 million after-tax in
the current year, two cents per share on a basic and fully diluted
basis and the effect of the new standard for fiscal 2003 was a
charge of $4 million after-tax. As at October 31, 2003, the Bank
has recognized a liability for asset retirement obligations related to
capitalized leasehold improvements of $53 million for U.S. GAAP
reporting purposes.