TD Bank 2009 Annual Report Download - page 87

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 83
required to use judgment in estimating the fair value of reporting units
and the use of different assumptions and estimates in the fair value
calculations could influence the determination of the existence of
impairment and the valuation of goodwill. Management believes that
the assumptions and estimates used are reasonable and supportable.
Where possible, fair values generated internally are compared to rele-
vant market information. The carrying values of the Bank’s reporting
units are determined by management using economic capital models to
adjust net assets and liabilities by reporting unit. These models consider
various factors including market risk, credit risk, and operational risk,
and are designed to produce the equity capital 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 units.
The Bank’s 2009 goodwill testing concludes that the goodwill in
each reporting unit is considered not to be impaired. Additionally, none
of the Bank’s reporting units are at risk of failing the first step of
goodwill impairment testing.
Other intangible assets with an indefinite life are not subject to
amortization; rather, they should be assessed annually for impairment.
As at October 31, 2009, the Bank does not have any indefinite life
intangibles. Finite life intangible assets that are subject to amortization,
after initial recognition, are amortized over their estimated useful life.
The Bank makes an annual assessment on whether any events or
changes in circumstances have occurred to indicate that the carrying
value of these finite life intangible assets may not be recoverable.
Determining the estimated useful life and the identification of any
events or changes in circumstances affecting the recoverability of
carrying value of these finite life intangible assets requires an analysis
of facts and management’s judgment. When events or changes in
circumstances indicate that the carrying value may not be recoverable
and the carrying value is higher than the sum of undiscounted cash
flows expected from the asset’s use and eventual disposition, the asset
is written down to its fair value.
This accounting policy impacts all of the Bank’s business segments.
See Note 9 to the 2009 Consolidated Financial Statements for addi-
tional disclosures regarding goodwill and other intangibles.
PENSIONS AND POST-RETIREMENT BENEFITS
Pension and post-retirement benefits obligation and expense are
dependent on the assumptions used in calculating these amounts. The
actuarial assumptions of expected long-term return on plan assets,
compensation increases, health care cost trend rate and discount rate
are management’s best estimates and are reviewed annually with the
Bank’s actuaries. The Bank develops each assumption using relevant
experience in conjunction with market related data and considers
if there is any prolonged or significant impact on the assumptions.
The discount rate used to value liabilities is based on long-term
corporate AA bond yields as at the measurement date. The expected
long term return on plan assets is based on historical returns and
future expectations for returns for each asset class, as well as the target
asset allocation of the fund. The other assumptions are also long-term
estimates. All assumptions 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 obligation and expense in future years. All
of the Bank’s segments are impacted by this accounting policy.
The following table provides the sensitivity of the accrued pension
benefit obligation and the pension expense for The Pension Fund
Society of The Toronto-Dominion Bank (the Society), the most material
of the Bank’s pension plans, as at October 31, 2009, to changes in
the discount rate and assumptions for expected long-term return on
plan assets and compensation increases. The sensitivity analysis
provided in the table is hypothetical and should be used with caution.
For a further discussion of the key assumptions used in determining
the Bank’s annual pension expense and accrued benefit obligation,
see Note 25 to the 2009 Consolidated Financial Statements.
SENSITIVITY OF CHANGE IN KEY ASSUMPTIONS
TABLE 47
(millions of Canadian dollars, except as noted) Obligation Expense
Impact of a change of 1.0% in key assumptions
Discount rate assumption used 6.90% 7.40%
1
Decrease in assumption $ 342 $ 51
Increase in assumption (269) (41)
Expected long-term return on assets assumption used n/a 6.75%
Decrease in assumption n/a 22
Increase in assumption n/a (22)
Rate of compensation increase assumption used 3.50% 3.50%
Decrease in assumption $ (67) $ (16)
Increase in assumption 67 17
1The Society was re-measured on October 31, 2008 using a 7.4% discount rate.
For the purposes of this illustration, the 12-month impact of the new valuation
was used.
INCOME TAXES
Accounting for current income taxes requires the Bank to exercise
judgment for issues relating to certain complex transactions, known
issues under discussion with tax authorities and matters yet to be
settled in court. As a result, the Bank maintains a tax provision for
contingencies and regularly assesses the adequacy of this tax provision.
Future income taxes are recorded to account for the effects of
future taxes on transactions occurring in the current period. The
accounting for future income taxes impacts all of the Bank’s segments
and requires judgment in the following key situations:
•Future tax assets are assessed for recoverability. The Bank records
a valuation allowance when it believes, based on all available
evidence, that it is more likely than not that all of the future tax
assets recognized will not be realized before their expiration. The
amount of the future income tax asset recognized and considered
realizable could, however, be reduced if projected income is not
achieved due to various factors, such as unfavourable business
conditions. If projected income is not expected to be achieved, the
Bank would record an additional valuation allowance to reduce its
future tax assets to the amount that it believes can be realized. The
magnitude of the valuation allowance is significantly influenced
by the Bank’s forecast of future profit generation, which determines
the extent to which it will be able to utilize the future tax assets.
•Future tax assets are calculated based on tax rates expected to be in
effect in the period in which they will be realized. Previously recorded
tax assets and liabilities need to be adjusted when the expected date
of the future event is revised based on current information.
•The Bank has not recognized a future income tax liability for
undistributed earnings of certain operations as it does not plan to
repatriate them. Estimated taxes payable on such earnings in the
event of repatriation would be $462 million at October 31, 2009.
CONTINGENT LIABILITIES
Contingent liabilities arise when there is some uncertainty whether,
as a result of a past event or transaction, the Bank will incur a loss
in the future. 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 a material
adverse effect on the financial condition of the Bank.
Contingent loss accruals are established when it becomes likely
that the Bank will incur an expense and the amount can be reasonably
estimated. In addition to the Bank’s management, for contingent
litigation loss accruals, internal and external experts are involved in
assessing the likelihood and in estimating any amounts involved.
Throughout the existence of a contingency, the Bank’s management
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 32 to the Bank’s Consolidated Financial Statements for
more details.