TD Bank 2005 Annual Report Download - page 81

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Financial Results 77
SECURITIES
Investment securities, excluding loan substitutes, are securities
where the Bank’s original intention is to hold to maturity or be
selectively sold given that market conditions render alternative
investments more attractive. Investment securities include invest-
ments in the merchant banking portfolio that are not publicly
traded and are generally held for longer terms than most other
securities. Investment securities are carried at cost or amortized
cost, adjusted to net realizable value to recognize other than
temporary impairment. Gains and losses realized on disposal are
determined on the average cost basis. Such gains, losses and
write downs areincluded in other income.
Trading securities are purchased with the intention of ultimate
resale. Trading securities, including trading securities sold short
included in liabilities, arecarried at market value. Gains and
losses on disposal and adjustments to market value are reported
in other income.
Interest income earned, amortization of premiums and dis-
counts on debt securities and dividends received from investment
and trading securities areincluded in interest income.
Loan substitutes aresecurities which have been structured as
after-tax instruments rather than conventional loans in order to
provide the issuers with a borrowing rate advantage and are
identical in risk and security to bank loans of comparable term.
Loan substitutes are carried at cost less any allowance for
anticipated credit losses.
SECURITIES PURCHASED UNDER REVERSE
REPURCHASE AGREEMENTS AND SOLD UNDER
REPURCHASE AGREEMENTS
Securities purchased under reverse repurchase agreements consist
of the purchase of a security with the commitment by the Bank
to resell the security to the original seller at a specified price.
Securities sold under repurchase agreements consist of the sale of
asecurity with the commitment by the Bank to repurchase the
security at a specified price. Securities purchased under reverse
repurchase agreements and obligations related to securities sold
under repurchase agreements are carried at amortized cost on
the Consolidated Balance Sheet. The difference between the sale
price and the agreed repurchase price on a repurchase agreement
is recorded as interest expense. Conversely, the difference
between the cost of the purchase and the predetermined pro-
ceeds to be received on a resale agreement is recorded as interest
income. The Bank takes possession of the underlying collateral,
monitors its market value relative to the amounts due under the
agreements and when necessary, requires transfer of additional
collateral or reduction in the security balance to maintain con-
tractual margin protection. In the event of counterparty default,
the financing agreement provides the Bank with the right to
liquidate the collateral held.
SECURITIES
NOTE 2
FUTURE ACCOUNTING AND REPORTING CHANGES
Financial Instruments, Hedges and Comprehensive Income
The CICA has issued three new accounting standards – Financial
Instruments – Recognition and Measurement, Hedges and
Comprehensive Income. These standards are substantially harmo-
nized with U.S. GAAP and are effective for the Bank beginning in
fiscal 2007. The principal impacts of the standards are as follows:
Financial assets will be classified as available for sale, held
to maturity, trading or loans and receivables. Held to maturity
assets will be limited to fixed maturity instruments that the
Bank intends to and is able to hold to maturity and will be
accounted for at amortized cost. Trading assets will continue
to be accounted for at fair value with realized and unrealized
gains and losses reported through net income. The remaining
assets will potentially be classified as available for sale and
measured at fair value with unrealized gains and losses recog-
nized through other comprehensive income.
Other comprehensive income will be a new component of
shareholder’s equity and a new statement entitled Statement of
Comprehensive Income will be added to the Bank’s primary
financial statements. Comprehensive income is comprised of the
Bank's net income and other comprehensive income. Other com-
prehensive income includes unrealized gains and losses on avail-
able for sale securities, foreign currency translation and derivative
instruments designated as cash flow hedges, net of income taxes.
For fair value hedges, where the Bank is hedging changes in
the fair value of assets, liabilities or firm commitments, the
change in the value of derivatives and hedged items will be
recorded in the Consolidated Statement of Income. For cash flow
hedges where the Bank is hedging the variability in cash flows
related to variable rate assets, liabilities or forecasted transac-
tions, the effective portion of the changes in the fair values of
the derivative instruments will be recorded through other com-
prehensive income until the hedged items are recognized in the
Consolidated Statement of Income.