TD Bank 2006 Annual Report Download - page 73

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 69
units are determined by management using economic capital
models to adjust net assets and liabilities by reporting unit. These
models consider various factors, such as market risk, credit risk,
and operational risk, and are designed to produce the equity capi-
tal a reporting unit would have if it was a stand-alone entity. The
Capital Management Committee reviews the Bank’s allocation of
economic capital to the reporting unit.
Intangible assets that derive their value from contractual
customer relationships or that can be separated and sold, and
have a finite useful life, are amortized over their estimated useful
life. Determining the estimated useful life of these finite life
intangible assets requires an analysis of the circumstances and
management judgment. Finite life intangible assets are tested for
impairment whenever circumstances indicate that the carrying
value may not be recoverable. Such circumstances would indicate
potential intangible asset impairment and would require a cash
flow analysis at that time. The finite life intangible assets would
be written down to net recoverable value based on expected
future cash flows. This accounting policy impacts all of the
Bank’s business segments. See Note 5 of the Consolidated
Financial Statements for additional disclosures regarding good-
will and intangible assets.
ACCOUNTING FOR PENSIONS
AND POST-RETIREMENT BENEFITS
Pension and post-retirement benefits obligation and expense is
dependent on the assumptions used in calculating these
amounts. The actuarial assumptions are determined by manage-
ment and arereviewed annually by the Bank’s actuaries. These
assumptions include the discount rate, the rate of compensation
increase, the overall health care cost trend rate and the expected
long-term rate of return on plan assets. The discount rate used
to value liabilities is based on long-term corporate AA bond
yields as at the valuation date. The other assumptions are also
long-term estimates. The expected long-term rate of return on
plan assets assumption is based on historical returns and future
expectations for returns for each asset class, as well as the target
asset allocation of the fund. As these assumptions relate to fac-
tors that are long term in nature, they are subject to a degree of
uncertainty. Differences between actual experience and the
assumptions,as well as changes in the assumptions resulting
from changes in future expectations, result in increases or
decreases in the pension and post-retirement benefits expense in
future years.
The following table provides the sensitivity of the accrued
pension benefit obligation and the pension expense for the
Bank’sprincipal pension plan to changes in the discount rate,
(millions of Canadian dollars) Obligation Expense
Impact of a change of 1.0% in key assumptions
Discount rate assumption used 5.50% 5.20%
Decrease in assumption $ 334 $ 52
Increase in assumption $(262) $(39)
Expected long-term return on
assets assumption used 6.75% 6.75%
Decrease in assumption N/A N/A
Increase in assumption N/A N/A
Rate of compensation increase assumption used 3.50% 3.50%
Decrease in assumption $ (79) $(19)
Increase in assumption $ 90 $ 22
expected long term return on plan assets assumption and rate
of compensation increase as at October 31, 2006. The sensitivity
analysis provided in the table is hypothetical and should be
used with caution. All of the Bank’s segments are impacted
by this accounting policy. For a further discussion of the key
assumptions used in determining the Bank’s annual pension
expense and accrued benefit obligation, see Note 15 to the
Consolidated Financial Statements.
CONTINGENT LIABILITIES
The Bank and its subsidiaries are involved in various legal
actions in the ordinary course of business, many of which are
loan-related. In management’s opinion, the ultimate disposition
of these actions, individually or in the aggregate, will not have
amaterial adverse effecton the financial condition of the Bank.
Contingent litigation loss accruals are established when it
becomes probable that the Bank will incur an expense and the
amount can be reasonably estimated. In addition to the Bank’s
management, internal and external experts are involved in
assessing probability and in estimating any amounts involved.
Throughout the existence of a contingency,the Bank’smanage-
ment or its experts may learn of additional information that may
impact its assessments about probability or about the estimates
of amounts involved. Changes in these assessments may lead to
changes in recorded loss accruals. In addition, the actual costs of
resolving these claims may be substantially higher or lower than
the amounts accrued for those claims.
See Note 20 to the Bank’s Consolidated Financial Statements
for more details.
DERIVATIVES
The impact of non-trading derivatives on net interest income and
other income for the year ended October 31, 2006 is provided in
Table 36 below.
Non-trading derivatives Non-trading derivatives not
(millions of Canadian dollars) qualifying for hedge accounting qualifying for hedge accounting
Net interest income (loss) $53 $–
Other income –39
NON-TRADING DERIVATIVES
TABLE 36