TD Bank 2003 Annual Report Download - page 91

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Financial Results 89
Hedging relationships
During fiscal 2002, the Canadian Institute of Chartered
Accountants (CICA) issued an accounting guideline on hedging
relationships. The guideline is effective for the Bank beginning
November 1, 2003. The guideline sets out the criteria that must
be met in order to apply hedge accounting for derivatives and is
based on many of the principles outlined in the U.S. standard
relating to derivative instruments and hedging activities.
Specifically, the guideline provides detailed guidance on the
identification, designation, documentation and effectiveness of
hedging relationships, for purposes of applying hedge account-
ing; and the discontinuance of hedge accounting. The Bank
implemented the guideline on November 1, 2003 and as a result
the Bank’s credit default swap portfolio with a notional value of
$4 billion will no longer qualify for hedge accounting and will be
carried at fair value. The resulting transition loss of $32 million
will be deferred and recognized in income in the same period as
the corresponding gains, losses, revenues or expenses associated
with the original hedged item. The Bank will continue using
credit default swaps to manage credit risk which may result in
reported earnings volatility in future periods. The impact on
future results will depend on the Bank’s hedging strategies and
market volatility.
Consolidation of variable interest entities
During the second quarter, the Canadian Accounting Standards
Board approved a new accounting guideline on the consolidation
of variable interest entities (VIEs). The guideline is harmonized
with a recently issued U.S. Financial Accounting Standards Board
interpretation and will be effective for the Bank in fiscal 2005,
except for the disclosure requirements which will be effective in
the Bank’s second quarter of fiscal 2004. The Bank is currently
evaluating the impact of the new guideline and has not yet com-
pleted its analysis. There are significant uncertainties surrounding
the application and interpretation of this guidance, as a result the
following summarizes the Bank’s preliminary assessment of the
impact of adopting the new guideline.
Bank-originated assets
Based on a preliminary assessment, it is reasonably possible that
the Bank will need to consolidate securitized bank-originated
assets of approximately $4 billion. The Bank continues to investi-
gate restructuring alternatives for these assets.
Third party originated assets
Based on a preliminary assessment, it is reasonably possible that
the Bank will need to consolidate third party originated assets
of approximately $9 billion. The Bank continues to investigate
restructuring alternatives for these third party originated assets.
Mutual funds
Mutual funds in Canada may be considered VIEs with the
possibility that the Bank sponsors be considered the primary
beneficiary. The Bank is the sponsor of several mutual funds
with assets of approximately $47 billion.
Compensation trusts
Certain of the Bank’s stock-based compensation plans are funded
through trusts established for these purposes. It is reasonably
possible that the Bank may be considered the primary beneficiary
of these trusts and consequently, may need to consolidate.
Innovative capital structures
The Bank’s innovative capital structures typically involve the cre-
ation of a trust whose voting securities are 100% owned by Bank
sponsors and the trust issues beneficial ownership interests in the
form of trust securities to investors. The Bank currently accounts
for these securities as non-controlling interests in its Consolidated
Financial Statements. These structures are likely considered VIEs
under the new guideline and the determination of whether the
structures continue to be consolidated depends on the details of
the structure.
Other financial transactions
The Bank is also involved with other entities and/or structures
such as personal trusts and investment vehicles that could be
deemed VIEs. The Bank continues to assess the impact of the
new guideline on these transactions.
Asset retirement obligations
During the year, the CICA issued an accounting standard on
asset retirement obligations that is applicable to the Bank in
fiscal 2005. The new standard harmonizes Canadian GAAP with
current U.S. GAAP and requires that a liability for an asset retire-
ment obligation related to a long-lived asset be recognized in
the period in which it is incurred and recorded at fair value.
Impairment of long-lived assets
During the year, the CICA issued an accounting standard on
impairment of long-lived assets that is applicable to the Bank
in fiscal 2004. The new standard requires that impairment of
long-lived assets be measured as the amount by which the
asset’s carrying value exceeds its fair value.
NOTE 26 Future accounting changes