TD Bank 2012 Annual Report Download - page 108

TD BANK GROUP ANNUAL REPORT 2012 FINANCIAL RESULTS106
value using the assumptions that market participants would use
when pricing the asset or liability under current market conditions,
including assumptions about risk. IFRS 13 is effective for quarterly and
annual periods beginning on or after January 1, 2013, which will be
November 1, 2013 for the Bank, and is to be applied prospectively.
This new standard is not expected to have a material impact on the
financial position, cash flows, or earnings of the Bank.
Employee Benefits
The amendments to IAS 19, Employee Benefits (IAS 19), issued in June
2011, eliminate the corridor approach for actuarial gains and losses,
requiring the Bank to recognize immediately all actuarial gains and
losses in other comprehensive income. Service costs, in addition to net
interest expenses or income, are calculated by applying the discount
rate to the net defined benefit surplus or deficit, and will be recorded
in the Consolidated Statement of Income. Plan amendment costs will
be recognized in the period of a plan amendment, irrespective of its
vested status. Furthermore, a termination benefit obligation will be
recognized when the Bank can no longer withdraw the offer of the
termination benefit or recognize related restructuring costs. The
amendments to IAS 19 are effective for annual periods beginning on
or after January 1, 2013, which will be November 1, 2013 for the
Bank, and are to be applied retrospectively. The Bank is currently
assessing the impact of the amendments to IAS 19.
Presentation of Other Comprehensive Income
The amendments to IAS 1, Presentation of Financial Statements (IAS 1),
issued in June 2011, require entities to group items presented in other
comprehensive income on the basis of whether they might be reclassi-
fied to the Consolidated Statement of Income in subsequent periods
and items that will not be reclassified to the Consolidated Statement of
Income. The amendments did not address which items are presented
in other comprehensive income and did not change the option to pres-
ent items net of tax. The amendments to IAS 1 are effective for annual
periods beginning on or after July 1, 2012, which will be November 1,
2012 for the Bank, and are to be applied retrospectively. These amend-
ments are not expected to have a material impact on the financial
position, cash flows, or earnings of the Bank.
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 5
Asset-backed securities are primarily fair valued using third-party
vendor prices. The third-party vendor employs a valuation model which
maximizes the use of observable inputs such as benchmark yield curves
and bid-ask spreads. The model also takes into account relevant data
about the underlying collateral, such as weighted average terms to
maturity and prepayment rate assumptions.
Equity Securities
The fair value of equity securities is based on quoted prices in active
markets, where available. Where quoted prices in active markets are
not readily available, such as for private equity securities, or there
is a wide bid-offer spread, fair value is determined based on quoted
market prices for similar securities or through valuation techniques,
including discounted cash flow analysis, and multiples of earnings
before taxes, depreciation, and amortization, and other relevant
valuation techniques.
If there are trading restrictions on the equity security held, a valua-
tion adjustment is recognized against available prices to reflect the
nature of the restriction. However, restrictions that are not part of the
security held and represent a separate contractual arrangement that
has been entered into by the Bank and a third party should not impact
the fair value of the original instrument.
Retained Interests
The methods and assumptions used to determine fair value of retained
interests are described in Note 3.
Loans
The estimated fair value of loans carried at amortized cost, other than
debt securities classified as loans, reflects changes in market price
that have occurred since the loans were originated or purchased. For
fixed-rate performing loans, estimated fair value is determined by
discounting the expected future cash flows related to these loans at
current market interest rates for loans with similar credit risks. For
floating rate performing loans, changes in interest rates have minimal
impact on fair value since loans reprice to market frequently. On that
basis, fair value is assumed to approximate carrying value. The fair
value of loans is not adjusted for the value of any credit protection
the Bank has purchased to mitigate credit risk.
At initial recognition, debt securities classified as loans do not
include securities with quoted prices in active markets. When quoted
market prices are not readily available, fair value is based on quoted
market prices of similar securities, other third-party evidence or by
using a valuation technique that maximizes the use of observable
market inputs. If quoted prices in active markets subsequently become
available, these are used to determine fair value for debt securities
classified as loans.
Certain financial instruments are carried on the balance sheet at their
fair value. These financial instruments include trading loans and securi-
ties, assets and liabilities designated at fair value through profit or loss,
instruments classified as available-for-sale, derivatives, certain deposits
classified as trading, securitization liabilities at fair value, and obliga-
tions related to securities sold short.
METHODS AND ASSUMPTIONS
The Bank calculates fair values based on the following methods of
valuation and assumptions:
Government and Government-Related Securities
The fair value of Canadian government debt securities is primarily
based on quoted prices in active markets, where available. Where
quoted prices are not available, valuation techniques such as
discounted cash flow models may be used, which maximize the use
of observable inputs such as government yield curves.
The fair value of U.S. federal and state government, as well as
agency debt securities, is determined by reference to recent transac-
tion prices, broker quotes, or third-party vendor prices. Brokers or
third-party vendors may use a pool-specific valuation model to value
these securities. Observable market inputs to the model include To Be
Announced (TBA) market prices, the applicable indices, and metrics
such as the coupon, maturity, and weighted average maturity of the
pool. Market inputs used in the valuation model include, but are not
limited to, indexed yield curves and trading spreads.
The fair value of residential mortgage-backed securities is primarily
determined using valuation techniques, such as the use of option-
adjusted spread (OAS) models which include inputs such as prepay-
ment rate assumptions related to the underlying collateral. Observable
inputs include, but are not limited to, indexed yield curves, and bid-ask
spreads. Other inputs may include volatility assumptions derived using
Monte Carlo simulations and take into account factors such as coun-
terparty credit quality, liquidity, and concentration.
Other Debt Securities
The fair value of corporate and other debt securities, including debt
securities reclassified from trading, is primarily based on broker quotes,
third-party vendor prices, or other valuation techniques, such as
discounted cash flow techniques. Market inputs used in the valuation
techniques or underlying third-party vendor prices or broker quotes
include benchmark and government yield curves, credit spreads, and
trade execution data.