TD Bank 2012 Annual Report Download - page 105

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS 103
For property and casualty insurance, insurance claims and policy
benefit liabilities represent current claims and estimates for future
insurance policy claims, as determined by the appointed actuary in
accordance with accepted actuarial practices and are reported as other
liabilities. Expected claims and policy benefit liabilities are determined
on a case-by-case basis as insurance claims are reported and actuarial
assumptions are reassessed. In addition to reported claims information,
the liabilities recognized by the Bank include a provision to account for
the future development of insurance claims, including insurance claims
incurred but not reported by policyholders (IBNR). IBNR liabilities are
evaluated based on historical development trends and actuarial
methodologies for groups of claims with similar attributes. For life
and health insurance, actuarial liabilities represent the present values
of future policy cash flows as determined using standard actuarial
valuation practices. Changes in actuarial liabilities are reported in
other income.
PROVISIONS
Provisions are recognized when the Bank has a present obligation
(legal or constructive) as a result of a past event, the amount of which
can be reliably estimated, and it is probable that an outflow of
resources will be required to settle the obligation.
Provisions are measured based on management’s best estimate of
the consideration required to settle the obligation at the end of the
reporting period, taking into account the risks and uncertainties
surrounding the obligation. If the effect of the time value of money is
material, provisions are measured at the present value of the expendi-
ture expected to be required to settle the obligation, using a discount
rate that reflects the current market assessments of the time value of
money and the risks specific to the obligation. The increase in provi-
sions due to the passage of time is recognized as interest expense.
INCOME TAXES
Income tax is comprised of current and deferred tax. Income tax
is recognized in the Consolidated Statement of Income except to
the extent that it relates to items recognized in other comprehensive
income or directly in equity, in which case the related taxes are
also recognized in other comprehensive income or directly in
equity, respectively.
Deferred tax is recognized on temporary differences between the
carrying amounts of assets and liabilities in the Consolidated Balance
Sheet and the amounts attributed to such assets and liabilities for tax
purposes. Deferred tax assets and liabilities are determined based on
the tax rates that are expected to apply when the assets or liabilities
are reported for tax purposes. Deferred tax assets are recognized only
when it is probable that sufficient taxable profit will be available in
future periods against which deductible temporary differences may be
utilized. Deferred tax liabilities are not recognized on temporary differ-
ences arising on investments in subsidiaries, branches and associates,
and interests in joint ventures if the Bank controls the timing of
the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
The Bank records a provision for uncertain tax positions if it is prob-
able that the Bank will have to make a payment to tax authorities
upon their examination of a tax position. This provision is measured at
the Bank’s best estimate of the amount expected to be paid. Provisions
are reversed to income in the period in which management determines
they are no longer required or as determined by statute.
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
NOTE 3
losses represent management’s best estimate of impairment incurred
in the lending portfolios, including any off-balance sheet exposures,
at the balance sheet date. Judgment is required as to the timing of
designating a loan as impaired and the amount of the allowance
required. Management exercises judgment as to the amount that will
be recovered once the borrower defaults. Changes in the amount that
management expects to recover would have a direct impact on the
provision for credit losses and may result in a change in the allowance
for credit losses.
If there is no objective evidence of impairment for an individual
loan, whether significant or not, the loan is included in a group of
assets with similar credit risk characteristics and collectively assessed
for impairment for losses incurred but not identified. In calculating the
probable range of allowance for incurred but not identified credit
losses, the Bank employs internally developed models that utilize
parameters for probability of default, loss given default and exposure
at default. Management’s judgment is used to determine the point
within the range that is the best estimate of losses, based on an
assessment of business and economic conditions, historical loss experi-
ence, loan portfolio composition, and other relevant indicators that are
not fully incorporated into the model calculation. Changes in these
assumptions would have a direct impact on the provision for incurred
but not identified credit losses and may result in a change in the
related allowance for credit losses.
FAIR VALUE MEASUREMENT
The fair value of financial instruments traded in active markets at the
balance sheet date is based on their quoted market prices. For all other
financial instruments not traded in an active market, 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. Observable market inputs may include interest rate yield curves,
foreign exchange rates, and option volatilities. Valuation techniques
include comparisons with similar instruments where observable market
prices exist, discounted cash flow analysis, option pricing models, and
other valuation techniques commonly used by market participants.
The estimates used in the Bank’s accounting policies are essential to
understanding its results of operations and financial condition. Some
of the Bank’s policies require subjective, complex judgments and esti-
mates as they relate to matters that are inherently uncertain. Changes
in these judgments or estimates could have a significant impact on the
Bank’s Consolidated Financial Statements. The Bank has established
procedures to ensure that accounting policies are applied consistently
and that the processes for changing methodologies for determining
estimates are well controlled and occur in an appropriate and system-
atic manner.
IMPAIRMENT OF FINANCIAL ASSETS
Available-for-Sale Securities
Impairment losses are recognized on available-for-sale securities if, and
only if, there is objective evidence of impairment as a result of one or
more events that have occurred (a ‘loss event’) and the loss event(s)
results in a decrease in the estimated cash flows of the instrument. The
Bank reviews these securities at least quarterly for the presence of
these conditions. This includes determining, as a matter of judgment,
whether a loss event has resulted in a decline in fair value below cost
that is significant or prolonged for available-for-sale equity securities,
and a deterioration of credit quality for available-for-sale debt securi-
ties. Other factors considered in the impairment assessment include
financial position and key financial indicators of the issuer of the
instrument, significant past and continued losses of the issuer, as well
as breaches of contract, including default or delinquency in interest
payments and loan covenant violations.
Loans
A loan (including a debt security classified as a loan) is considered
impaired when there is objective evidence that there has been a deterio-
ration of credit quality subsequent to the initial recognition of the loan
(a ‘loss event’) to the extent the Bank no longer has reasonable assur-
ance as to the timely collection of the full amount of principal and
interest. The Bank assesses loans for objective evidence of impairment
individually for loans that are individually significant, and collectively
for loans that are not individually significant. Allowance for credit