TD Bank 2012 Annual Report Download - page 106

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS104
For certain complex or illiquid financial instruments, fair value is
determined using valuation techniques in which current market
trans-
actions or observable market inputs are not available. Determining
which
valuation technique to apply requires judgment. The valuation tech-
niques themselves also involve some level of estimation and judgment.
The judgments include liquidity considerations and model inputs such
as volatilities, correlation, spreads, discount rates, pre-payment rates,
and prices of underlying instruments. Any imprecision in these esti-
mates can affect the resulting fair value.
The inherent nature of private equity investing is that the Bank’s
valuation will change over time as the underlying investment matures
and an exit strategy is developed and realized. Estimates of fair value
may also fluctuate due to developments in the business underlying the
investment. Such fluctuations may be significant depending on the
nature of the factors going into the valuation methodology and the
extent of change in those factors.
For certain types of equity instruments fair value is assumed to
approximate carrying value where the range of reasonable valuation
techniques is significant and the probabilities of such valuation
techniques cannot be reasonably assessed. In such instances fair value
may not be reliably measured due to the equity instruments unique
characteristics, including trading restrictions or that quoted market
prices for similar securities are not available.
Judgment is also used in recording fair value adjustments to model
valuations to account for measurement uncertainty when valuing
complex and less actively traded financial instruments. If the market
for a complex financial instrument develops, the pricing for this
instrument may become more transparent, resulting in refinement
of valuation models.
An analysis of fair values of financial instruments and further details
as to how they are measured are provided in Note 5.
DERECOGNITION
Certain assets transferred as part of securitization transactions may
qualify for derecognition from the Bank’s Consolidated Balance Sheet.
To qualify for derecognition certain key determinations must be made.
A decision must be made as to whether the rights to receive cash
flows from the financial assets has been retained or transferred and
the extent to which the risks and rewards of ownership of the financial
asset has been retained or transferred. If the Bank neither transfers nor
retains substantially all of the risks and rewards of ownership of the
financial asset, a decision must be made as to whether the Bank has
retained control of the financial asset. Upon derecognition, the Bank
will record a gain or loss on sale of
those assets which 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. In determining the fair value of any
financial asset received, the Bank 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 significantly from those estimated by the Bank.
Retained interests are classified as trading securities and are initially
recognized at relative fair value on the Bank’s Consolidated Balance
Sheet. Subsequently, the fair value of retained interests recognized
by the Bank is determined by estimating the present value of future
expected cash flows using management’s best estimates of key
assumptions including credit losses, prepayment rates, forward yield
curves and discount rates, that are commensurate with the risks
involved. Differences between the actual cash flows and the Bank’s
estimate of future cash flows are recognized in income. These assump-
tions are subject to periodic review and may change due to significant
changes in the economic environment.
GOODWILL AND OTHER INTANGIBLES
The fair value of the Bank’s CGUs is determined from internally devel-
oped valuation models that consider various factors and assumptions
such as forecasted earnings, growth rates, price earnings multiples,
discount rates and terminal multiples. Management is required to use
judgment in estimating the fair value of CGUs 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 relevant market information.
The carrying amounts of the Bank’s CGUs are determined by manage-
ment using risk based capital models (based on advanced approaches
under Basel III) to adjust net assets and liabilities by CGU. These
models consider various factors including market risk, credit risk and
operational risk, including investment capital (comprised of goodwill
and intangibles). Any unallocated capital not directly attributable to
the CGUs is held within the Corporate segment. The Bank’s capital
oversight committees provide oversight to the Bank’s capital
allocation methodologies.
EMPLOYEE BENEFITS
The projected benefit obligation and expense related to the Bank’s
pension and non-pension post-retirement benefit plans are determined
using multiple assumptions that may significantly influence the value
of these amounts. Actuarial assumptions including 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 historical experience of the Bank in conjunc-
tion with market-related data and considers if the market-related data
indicates there is any prolonged or significant impact on the assump-
tions. The discount rate used to measure plan obligations is based on
long-term high quality corporate bond yields as at October 31. 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 uncer-
tainty. 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
non-pension post-retirement benefit plans obligations and expenses
in future years.
INCOME TAXES
The Bank is subject to taxation in numerous jurisdictions. There are
many transactions and calculations in the ordinary course of business
for which the ultimate tax determination is uncertain. The Bank main-
tains provisions for uncertain tax positions that it believes appropriately
reflect the risk of tax positions under discussion, audit, dispute, or
appeal with tax authorities, or which are otherwise considered to
involve uncertainty. These provisions are made using the Bank’s best
estimate of the amount expected to be paid based on an assessment
of all relevant factors, which are reviewed at the end of each reporting
period. However, it is possible that at some future date, an additional
liability could result from audits by the relevant taxing authorities.
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. The amount
of the deferred tax asset recognized and considered realizable could,
however, be reduced if projected income is not achieved due to vari-
ous factors, such as unfavourable business conditions. If projected
income is not expected to be achieved, the Bank would decrease its
deferred tax assets to the amount that it believes can be realized. The
magnitude of the decrease 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 deferred tax assets.