TD Bank 2011 Annual Report Download - page 101

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TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS 99
SECURITIES
NOTE 3
FINANCIAL INSTRUMENTS DESIGNATED AS TRADING
UNDER THE FAIR VALUE OPTION
Financial assets and financial liabilities, other than those classified as
trading, may be designated as trading under the fair value option
if fair values are reliably measurable, the asset or liability meets one
or more of the criteria set out below, and the asset or liability is so
designated by the Bank on initial recognition. Financial instruments
designated as trading under the fair value option and related interest
and dividend income are accounted for on the same basis as securities
classified as trading.
The Bank may designate financial assets and financial liabilities as
trading when the designation:
i) eliminates or significantly reduces valuation or recognition inconsis-
tencies that would otherwise arise from measuring financial assets
or financial liabilities, or recognizing gains and losses on them, on
different bases; or
ii)
applies to groups of financial assets, financial liabilities or combi-
nations thereof that are managed, and their performance evaluated,
on a fair value basis in accordance with a documented risk man -
agement or investment strategy, and where information about the
groups of financial instruments is reported to management on
that basis.
SECURITIES DESIGNATED AS TRADING UNDER
THE FAIR VALUE OPTION
Certain securities that support insurance reserves within certain of the
Bank’s insurance subsidiaries have been designated as trading under
the fair value option. The actuarial valuation of the insurance reserve is
based on a discount factor using the market yield of the assets
supporting the insurance reserve. By designating the securities as trad-
ing under the fair value option, the unrealized gain or loss on the secu-
rities is recognized in the Consolidated Statement of Income in the
same period as the loss or income resulting from changes to the
discount rate used to value the insurance reserves.
In addition, certain government and government insured securities
have been combined with derivatives to form economic hedging rela-
tionships. These securities are being held as part of the Bank’s overall
interest rate risk management strategy and have been designated as
trading under the fair value option. The derivatives are carried at fair
value, with the change in fair value recognized in the Consolidated
Statement of Income.
The total fair value of these securities designated as trading under
the fair value option was $2,980 million as at October 31, 2011 (2010 –
$2,983 million). These securities are recorded in trading securities on
the Consolidated Balance Sheet.
BUSINESS AND GOVERNMENT LOANS DESIGNATED
AS TRADING UNDER THE FAIR VALUE OPTION
Certain business and government loans held within a trading portfolio
or economically hedged with derivatives, are designated as trading
under the fair value option if the criteria described above are met. The
method of determining fair value of these loans is described earlier in
the Note.
The total fair value of these loans was $14 million as at October 31,
2011 (2010 – $85 million) which represents their maximum credit
exposure. These loans are recorded in business and government loans
on the Consolidated Balance Sheet.
These loans are managed as part of a trading portfolio with risk
limits that have been approved by the Bank’s risk management group
and are hedged with various financial instruments, including credit
derivatives. The Bank also uses other instruments within this trading
portfolio to hedge its total maximum exposure to loss. At October 31,
2011, the cumulative change in fair value of these loans attributable to
changes in credit risk was $9 million (2010 – nil), calculated by deter-
mining the changes in credit spread implicit in the fair value of the loans.
INCOME (LOSS) FROM FINANCIAL INSTRUMENTS DESIGNATED
AS TRADING UNDER THE FAIR VALUE OPTION
During the year ended October 31, 2011, income (loss) representing
net changes in the fair value of financial assets designated as trading
under the fair value option was $0.03 million (2010 – $37 million;
2009 – $256 million). Income (loss) from financial instruments desig-
nated as trading under the fair value option is included in other
income. This income (loss) is primarily offset by the changes in the fair
value of derivatives used to economically hedge these assets and is
recorded in other income (loss).
SECURITIES
The Bank classifies securities pursuant to the requirements of CICA
Handbook Section 3855 as trading (including those designated as
trading under the fair value option, described in Note 2), available-
for-sale, or held-to-maturity. Debt securities classified as loans are
discussed in Note 4.
Trading
Securities purchased with the intention of generating profits in the
near term are recorded on a trade date basis and are classified as
trading. Transaction costs are expensed as incurred. These securities
are accounted for at fair value with the change in fair value as well as
any gains or losses realized on disposal recognized in trading income.
Dividends are recognized on the ex-dividend date and interest income
is recognized on an accrual basis. Both are included in interest income.
Available-for-Sale
Securities classified as available-for-sale are recorded on a trade date
basis and are carried at fair value with changes in fair value recorded
in other comprehensive income. Equity securities that are classified as
available-for-sale and do not have quoted market prices are recorded
at cost. Gains and losses realized on disposal of available-for-sale
securities are calculated on an average cost basis and are recognized
in net securities gains (losses) in non-interest income. Dividends are
recognized on the ex-dividend date and interest income is recognized
on an accrual basis using the effective interest rate method. Both are
included in interest income.
Held-to-Maturity
Securities with a fixed maturity date that the Bank intends and has
the ability to hold to maturity are classified as held-to-maturity and
accounted for at amortized cost. Interest income is recognized using
the effective interest rate method.