TD Bank 2006 Annual Report Download - page 116

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results
112
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 recorded in income. For
cash flow hedges, the Bank is hedging the variability 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. At the
end of 2006, deferred net gains (losses) on derivative instruments
of $43 million (2005 – $(40) million; 2004 – $90 million) included
in other comprehensive income are expected to be reclassified
to earnings during the next fiscal year. Cash flow hedges also
include hedges of certain forecasted transactions up to a maxi-
mum of 23 years, although a substantial majority is under 4 years.
The ineffective portion of hedging derivative instruments’ changes
in fair values are immediately recognized in income. For 2006,
under U.S. GAAP, the Bank recognized pre-tax losses of $74 mil-
lion (2005 – nil; 2004 – nil) for the ineffective portion of cash
flow hedges.
Under Canadian GAAP, the Bank recognizes non-trading
derivatives that are in ineffective hedging relationships or that are
hedges not designated in a hedging relationship at fair value on
the Consolidated Balance Sheet. In 2006, U.S. GAAP adjustments
for derivative instruments and hedging activities increased net
interest income by $52 million before tax (2005 – increased by
$130 million before tax) and decreased other income by $57 mil-
lion before tax. (2005 – decreased by $417 million before tax).
(e) GUARANTEES
During 2003, the Bank adopted the U.S. interpretation on guar-
antor’s accounting and disclosure requirements for guarantees,
including indirect guarantees of indebtedness of others. As a
result, for U.S. GAAP purposes, the initial liability for obligations
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 liabilities
recorded on the Consolidated Balance Sheet is $85 million for
U.S. GAAP purposes (2005 – $55 million). Under Canadian
GAAP, a liability is not recognized at the inception of a guaran-
tee. In 2006, U.S. GAAP adjustments for guarantees increased
non-interest expenses by $30 million before tax (2005 – increased
$22 million).
(f) LIABILITIES AND EQUITY
As of November 1, 2004, the Bank adopted the CICA amend-
ments to its accounting standardon financial instruments – dis-
closure and presentation on a retroactive basis with restatement
of prior periods. As a result of these amendments, the Bank was
required to classify its existing preferred shares and innovative
capital structures as liabilities and their corresponding distribu-
tions as interest expense for Canadian GAAP. However, under
U.S. GAAP preferred shares of the Bank (except preferred shares
of the Bank’s subsidiary TD Mortgage Investment Corporation)
continue to be considered equity and innovative capital structures
continue to be considered non-controlling interest. In addition,
under U.S. GAAP, preferred shares of the Bank’s subsidiary,
TD Mortgage Investment Corporation, continue to be presented
as a non-controlling interest on the Consolidated Balance Sheet,
and the net income applicable to the non-controlling interest
continues to be presented separately on the Consolidated
Statement of Income. In 2006, U.S. GAAP adjustments for liabili-
ties and equity increased net interest income by $126 million
(2005 – increased by $147 million).
(g) ACQUISITION OF TD BANKNORTH
For U.S. GAAP, the survival of TD Banknorth Inc., a company
created to effect the migratory merger that preceded the Bank’s
acquisition of TD Banknorth, resulted in a full fair value step up
of the TD Banknorth balance sheet. The impact of the step
up for U.S. GAAP purposes was approximately a $2.2 billion
increase to the Bank’s goodwill and other intangibles offset with
approximately $2 billion in non-controlling interest and $200
million in futureincome taxes. There was no net impact on the
Bank’sU.S. GAAP net incomesince intangible amortization
and non-controlling interest were increased by offsetting
amounts. For Canadian GAAP purposes, the migratory merger
is not considered substantive and only the Bank’s share of TD
Banknorth assets and liabilities were stepped up to fair value as
the Bank was deemed the acquiror under the purchase method
of accounting.
(h) RESTRUCTURING COSTS
Under previous Canadian GAAP, restructuring costs incurred by
the Bank could be accrued as a liability provided that a restructur-
ing plan detailing all significant actions to be taken had been
approved by an appropriate level of management, 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 terminat-
ed be notified of their termination benefit arrangement.
(i) 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.
(j) STOCK-BASED COMPENSATION
Until October 5, 2002, under the Bank’s stock option plan, option
holders could elect to receive cash for the options equal to their
intrinsic value, being the excess of the market value of the share
over the option exercise price at the date of exercise. In account-
ing for stock options with this feature, U.S. GAAP requires
expensing the annual change in the intrinsic value of the stock
options. For options that have not fully vested, the change in
intrinsic value is amortized over the remaining vesting period.
Under previous Canadian GAAP,no expenses were recorded and
cash payments to option holders were charged to retained earn-
ings on a net of tax basis.Effective October 6, 2002, the plan
was amended so that new grants of options and all outstanding
options can only be settled for shares. As a result, for the purpos-
es of U.S. GAAP, the accrued liability for stock options of $39 mil-
lion after-tax was reclassified to capital as at October 6, 2002.
Beginning in fiscal 2003, the Bank has expensed stock option
awards for both Canadian and U.S. GAAP purposes using the fair
value method of accounting for stock options.There is no contin-
uing Canadian and U.S. GAAP difference as the Bank has entirely
reversed the accrued liability reclassified to capital for exercises
and forfeitures of stock options that existed at October 6, 2002.
(k)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.
Changes in Accounting Policies
Variable Interest Entities
On August 1, 2006, the Bank adopted the Financial Accounting
Standards Board’s (FASB) staff position, FIN 46R-6, on variable
interest entities. The guidance provides additional clarification on
how to analyze variable interest entities and their consolidation
requirements. The adoption of this guidance did not result in a
material impact on the Bank’sConsolidated U.S. GAAP Financial
Statements.
Future Changes in Accounting Policies and Estimates – U.S.
GAAP
Accounting for Certain Hybrid Financial Instruments
Effective November 1, 2007, the Bank will be required to adopt
FASB’sguidance on certain hybrid financial instruments. Under
this guidance, the Bank will be able to elect to measure certain
hybrid financial instruments at fair value in their entirety,with
changes in the fair value recognized in net income. The fair value
election will eliminate the need to separately recognize certain
derivatives embedded in these hybrid financial instruments.