TD Bank 2012 Annual Report Download - page 102

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS100
Monetary assets and liabilities denominated in a currency that
differs from an entity’s functional currency are translated into the
functional currency of the entity at exchange rates prevailing at the
balance sheet date. Non-monetary assets and liabilities are translated
at historical exchange rates. Income and expenses are translated into
an entity’s functional currency at average exchange rates prevailing
throughout the year. Translation gains and losses are included in
non-interest income except for available-for-sale equity securities
where unrealized translation gains and losses are recorded in other
comprehensive income until the asset is sold or becomes impaired.
Foreign-currency denominated subsidiaries are those with a func-
tional currency other than Canadian dollars. For the purpose of trans-
lation into the Bank’s functional currency, all assets and liabilities are
translated at exchange rates in effect at the balance sheet date and
all income and expenses are translated at average exchange rates for
the period. Unrealized translation gains and losses relating to these
operations, net of gains or losses arising from net investment hedges
of these positions and applicable income taxes, are included in other
comprehensive income. Translation gains and losses accumulated
in other comprehensive income are recognized in the Consolidated
Statement of Income upon the disposal or partial disposal of the
investment in the foreign operation. The investment balance of foreign
entities accounted for by the equity method, including TD Ameritrade,
is translated into Canadian dollars using the closing rate at the end
of the period with exchange gains or losses recognized in other
comprehensive income.
OFFSETTING OF FINANCIAL INSTRUMENTS
Financial assets and liabilities are offset, with the net amount
presented in the Consolidated Balance Sheet, only if the Bank currently
has a legally enforceable right to set off the recognized amounts, and
intends either to settle on a net basis or to realize the asset and settle
the liability simultaneously. In all other situations assets and liabilities
are presented on a gross basis.
DETERMINATION OF FAIR VALUE
The fair value of a financial instrument on initial recognition is normally
the transaction price, i.e., the fair value of the consideration given or
received. The best evidence of fair value is quoted prices in active
markets, and is based on bid prices for financial assets, and offered
prices for financial liabilities. When financial assets and liabilities have
offsetting market risks, the Bank uses mid-market prices as a basis
for establishing fair values for the offsetting risk positions and applies
the bid or offered price to the net open position, as appropriate.
When there is no active market for the instrument, the fair value may
be based on other observable current market transactions involving
the same instrument, without modification or repackaging, or is based
on a valuation technique which maximizes the use of observable
market inputs.
The Bank recognizes various types of valuation adjustments to
account for factors that market participants would use in determining
fair value which are not included in valuation techniques due to system
limitations or measurement uncertainty. Valuation adjustments reflect
the Bank’s assessment of factors that market participants would use in
pricing the asset or liability. These include, but are not limited to, the
unobservability of inputs used in the pricing model, or assumptions
about risk, such as creditworthiness of each counterparty and risk
premiums that market participants would require given the inherent
risk in the pricing model.
If there is a difference between the initial transaction price and the
value based on a valuation technique which includes observable
market inputs, the difference is referred to as inception profit or loss.
Inception profit or loss is recognized into income upon initial recogni-
tion of the instrument. When an instrument is measured using a valua-
tion technique that utilizes non-observable inputs, it is initially valued
at the transaction price, which is considered the best estimate of fair
value. Subsequent to initial recognition, any difference between the
transaction price and the value determined by the valuation technique
at initial recognition is recognized into income as non-observable
inputs become observable.
If the fair value of a financial asset measured at fair value becomes
negative, it is recognized as a financial liability until either its fair value
becomes positive, at which time it is recognized as a financial asset, or
until it is extinguished.
DERECOGNITION OF FINANCIAL INSTRUMENTS
Financial Assets
The Bank derecognizes a financial asset when the contractual rights to
that asset have expired. Derecognition may also be appropriate where
the contractual right to receive future cash flows from the asset have
been transferred, or where the Bank retains the rights to future cash
flows from the asset, but assumes an obligation to pay those cash
flows to a third party subject to certain criteria.
When the Bank transfers a financial asset, it is necessary to assess
the extent to which the Bank has retained the risks and rewards of
ownership of the transferred asset. If substantially all the risks and
rewards of ownership of the financial asset have been retained, the
Bank continues to recognize the financial asset and also recognizes a
financial liability for the consideration received. If substantially all the
risks and rewards of ownership of the financial asset have been trans-
ferred, the Bank will derecognize the financial asset and recognize
separately as assets or liabilities any rights and obligations created or
retained in the transfer. The Bank determines whether substantially all
the risk and rewards have been transferred by quantitatively compar-
ing the variability in cash flows before and after the transfer. If the
variability in cash flows does not change significantly as a result of the
transfer, the Bank has retained substantially all of the risks and
rewards of ownership.
If the Bank neither transfers nor retains substantially all the risks and
rewards of ownership of the financial asset, the Bank derecognizes
the financial asset where it has relinquished control of the financial
asset. The Bank is considered to have relinquished control of the finan-
cial asset where the transferee has the practical ability to sell the
transferred financial asset. Where the Bank has retained control of the
financial asset, it continues to recognize the financial asset to the
extent of its continuing involvement in the financial asset. Under these
circumstances, the Bank usually retains the rights to future cash flows
relating to the asset through a residual interest and is exposed to some
degree of risk associated with the financial asset.
The derecognition criteria are also applied to the transfer of part
of an asset, rather than the asset as a whole, or to a group of similar
financial assets in their entirety, when applicable. If transferring a
part of an asset, it must be a specifically identified cash flow, a fully
proportionate share of the asset, or a fully proportionate share of a
specifically identified cash flow.
Securitization
Securitization is the process by which financial assets are transformed
into securities. The Bank securitizes financial assets by transferring
those financial assets to a third party and as part of the securitization,
certain financial assets may be retained and may consist of an interest-
only strip, servicing rights and, in some cases, a cash reserve account
(collectively referred to as ‘retained interests’). If the transfer qualifies
for derecognition, a gain or loss is recognized immediately in other
income after the effects of hedges on the assets sold, if applicable.
The amount of the gain or loss is calculated as the difference between
the carrying amount of the asset transferred and the sum of any cash
proceeds received, including any financial asset received or financial
liability assumed, and any cumulative gain or loss allocated to the
transferred asset that had been recognized in other comprehensive
income. To determine the value of the retained interest initially
recorded, the previous carrying value of the transferred asset is allo-
cated between the amount derecognized from the balance sheet and
the retained interest recorded, in proportion to their relative fair values
on the date of transfer. Subsequent to initial recognition, as market
prices are generally not available for retained interests, fair value is
determined by estimating the present value of future expected cash
flows using management’s best estimates of key assumptions that
market participants would use in determining fair value. Refer to
Note 3 for assumptions used by management in determining the fair
value of retained interests.