TD Bank 2009 Annual Report Download - page 86

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS82
(millions of Canadian dollars, except as noted) Financial assets Financial liabilities
Obligations
Available- related to
Trading for-sale Trading securities
securities1securities2,3 Loans1,3 Derivatives deposits sold short Derivatives
2009
Fair value $ 54,320 $ 82,599 $ 350 $ 49,445 $ 35,419 $ 17,641 $ 48,152
Based on:
Level 1: Quoted market prices 50% 15% –% 2% –% 38% 2%
Level 2: Valuation techniques with significant
observable market inputs or broker-dealer quotes 47 85 94 96 97 62 95
Level 3: Valuation techniques with significant
non-observable market inputs 3–623–3
Total 100% 100% 100% 100% 100% 100% 100%
2008
Fair value $ 59,497 $ 73,617 $ 510 $ 83,548 $ 44,694 $ 18,518 $ 74,473
Based on:
Level 1: Quoted market prices 47% 18% –% 2% –% 34% 2%
Level 2: Valuation techniques with significant
observable market inputs or broker-dealer quotes 49 71 93 95 99 65 95
Level 3: Valuation techniques with significant
non-observable market inputs 4 1173113
Total 100% 100% 100% 100% 100% 100% 100%
FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE BY VALUATION METHODOLOGY
TABLE 46
1Trading securities include securities that are designated as trading under the fair
value option.
2Excludes certain equity securities in the available-for-sale portfolio that do not
have quoted market prices and are carried at cost. The fair value of these equity
securities was $2,471 million (2008 – $1,790 million).
3As a result of the 2009 Amendments to CICA Handbook Section 3855, certain
available-for-sale and held-to-maturity securities were reclassified to loans, as
described in the “Changes in Accounting Policies during the Current Year” section.
The following table summarizes the Bank’s significant financial assets
and financial liabilities carried at fair value by valuation methodology.
The potential effect of using reasonable possible alternative assumptions
for valuing these financial instruments would range from a reduction
in the fair value by $159 million (2008: $556 million) to an increase in
the fair value by $161 million (2008: $554 million) (before changes in
valuation adjustments). The prior year ranges were calculated based on
Level 3 balances which included non-agency collateralized mortgage
obligation debt securities as reported prior to the Amendments to CICA
Handbook Section 3855, as described in the “Changes in Accounting
Policies during the Current Year” section.
SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
There are two key determinations relating to accounting for securiti-
zations. The first key determination is in regard to bank-originated
securitized assets. A decision must be made as to whether the securi ti-
zation should be considered a sale under GAAP. GAAP requires that
specific criteria be met in order for the Bank to have surrendered control
of the assets and thus be able to recognize a gain or loss on sale. For
instance, the securitized assets must be isolated from the Bank and
placed beyond the reach of the Bank and its creditors, even in the case
of bankruptcy or receivership. In determining the gain or loss on sale,
management estimates future cash flows by relying on estimates of
the amount of interest that will be collected on the securitized assets,
the yield to be paid to investors, the portion of the securitized assets
that will be prepaid before their scheduled maturity, expected credit
losses, the cost of servicing the assets and the rate at which to discount
these expected future cash flows. Actual cash flows may differ signifi-
cantly from those estimated by management. If actual cash flows are
different from our estimate of future cash flows then the gains or
losses on the securitization recognized in income will be adjusted.
Retained interests are classified as trading securities and are carried
at fair value on the Bank’s Consolidated Balance Sheet. Note 5 to the
Bank’s Consolidated Financial Statements provide additional disclosures
regarding securitizations, including a sensitivity analysis for key
assumptions. For 2009, there were no significant changes to the key
assumptions used in estimating the future cash flows. These assump-
tions are subject to periodic review and may change due to significant
changes in the economic environment.
The second key determination is whether a VIE should be consoli-
dated. We hold interests in a number of VIEs, including all of the
Bank’s securitization trusts that are considered to be VIEs. Current
GAAP requires consolidation of a VIE only when the Bank is the
primary beneficiary, and exposed to a majority of the VIE’s expected
losses or entitled to a majority of the VIE’s expected residual returns.
In addition, if the VIE is a QSPE, a conclusion which requires judgment,
then the Bank does not consolidate the VIE. Management uses judg-
ment to estimate the expected losses and expected residual returns to
determine if the Bank retains substantially all of the residual risk and
rewards of the VIE.
Under current GAAP, all of the Bank-originated assets transferred to
VIEs meet the criteria for sale treatment and non-consolidation. This
accounting policy impacts Canadian Personal and Commercial Banking,
Wholesale Banking, Wealth Management, and the Corporate segment.
VALUATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill is not subject to amortization. Instead, it is tested for impair-
ment at the reporting unit level on an annual basis and if an event or
change in circumstances occurs that indicates that the carrying value
of the reporting unit might exceed its fair value. The first step of good-
will
impairment testing involves determining whether the fair value
of the reporting unit to which the goodwill is associated is less than its
carrying value. Where fair value of the reporting unit exceeds its carry-
ing value, goodwill of that reporting unit is considered not to be
impaired. When the fair value of the reporting unit is less than its
carrying value, a second step is required and the fair value of the
goodwill in that reporting unit is compared to its carrying value. If the
fair value of goodwill is less than its carrying value, goodwill is consid-
ered to be impaired and a charge for impairment representing the
excess of carrying value over fair value of the goodwill is recognized
immediately in the Consolidated Statement of Income.
The fair value of the Bank’s reporting units are determined from
internally developed valuation models that consider various factors and
assumptions such as forecasted earnings, growth rates, price earnings
multiples, discount rates, and terminal multiples. Management is