TD Bank 2006 Annual Report Download - page 82

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results
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SECURITIES
Trading securities are purchased with the intention of selling in
the near term. Trading securities, including trading securities sold
short included in liabilities, are carried at fair value. Fair value is
determined based on market value or, where market prices are
not readily available, on quoted market prices for similar securi-
ties, on other third-party evidence or by using another valuation
technique. Gains and losses realized on disposal and unrealized
gains and losses from changes in fair value are included in trad-
ing income.
Investment securities comprise debt and equity securities
purchased with the intention of holding for a period of time in
accordance with the Bank’s originally established investment
objectives but which may be sold in response to changes in such
investment objectives arising from changing market conditions.
Investment securities include investments in the merchant bank-
ing portfolio that are not publicly traded and are generally held
for longer terms than most other securities. Equity securities are
carried at cost and debt securities at amortized cost, adjusted to
net realizable value to recognize other than temporary
impairment. Realized gains and losses on disposal, determined on
an average cost basis, and write-downs to reflect other-than-tem-
porary impairments in value are included in net investment secu-
rities gains (losses). Realized and unrealized gains on securities
used in hedging activities are included in income in the same
period as the income from the items hedged.
Dividends and interest income on all securities is recognized on
the accrual basis and included in interest income. Amortization of
premiums and discounts on debt securities held for investment
are deferred and amortized over the life of the asset and are
included in interest income.
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 a security 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: CICA
Handbook Section 3855, Financial Instruments – Recognition
and Measurement; Section 3865, Hedges; and Section 1530,
Comprehensive Income. These standards are substantially
harmonized with U.S. GAAP and are effective for the Bank
beginning November 1, 2006. 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. Financial liabilities
will be classified as trading or other. Initially, all financial assets
and financial liabilities must be recorded on the balance sheet
at fair value. Subsequent measurement is to be determined by
the classification of each financial asset and financial liability.
Held-to-maturity assets will be limited to fixed-maturity instru-
ments that the Bank intends to and is able to hold to maturity
and will be accounted for at amortized cost using the effective
interest method. Loans and receivables will also be accounted for
at amortized cost using the effective interest method. Trading
assets will continue to be accounted for at fair value with realized
and unrealized gains and losses reported through net income.
The majority of the remaining assets will be classified as available
for sale and measured at fair value with unrealized gains and
losses recognized through other comprehensive income. Certain
assets and liabilities will be designated as trading under the fair
value option.
Other comprehensive income will be a new component of
shareholders’ equity and a new statement entitled Statement
of Comprehensive Income will be added to the Bank’s primary
financial statements. Comprehensive income is composed of the
Bank's net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on
available-for-sale securities, foreign currency translation and
changes in the fair market value of derivative instruments
designated as cash flow hedges, all net of income taxes.
The new standards require that all derivative instruments be
recognized as either assets or liabilities and measured at their
fair values. In addition, the new standards allow special hedge
accounting for some types of transactions provided that certain
criteria are met. For fair value hedges, where the Bank is hedging
changes in the fair value of assets, liabilities or firm commit-
ments, the change in the fair value of derivatives and hedged
items attributable to the hedged risk 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 transactions, the
effective portion of the changes in the fair values of the deriva-
tive instruments will be recorded through other comprehensive
income until the hedged items are recognized in the
Consolidated Statement of Income.
The CICA recently issued an exposure draft amending the
transitional provisions relating to Section 3865, Hedges. The Bank
will complete its determination of the transition adjustment for
all three standards once the transition rules are finalized.