TD Bank 2012 Annual Report Download - page 87

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 85
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 uncertainty.
Differences between actual experience and the assumptions, as well as
changes in the assumptions resulting from changes in future expecta-
tions, 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.
PROVISIONS
Provisions arise when there is some uncertainty in the timing or amount
of a loss in the future. Provisions are based on the Bank’s best estimate
of all expenditures required to settle its present obligations, considering
all relevant risks and uncertainties, as well as, when material, the effect
of the time value of money.
Many of the Bank’s provisions relate to various legal actions that the
Bank is involved in during the ordinary course of business. Legal provi-
sions require the involvement of both the Bank’s management and
legal counsel when assessing the probability of a loss and estimating
any monetary impact. Throughout the life of a provision, the Bank’s
management or legal counsel may learn of additional information that
may impact its assessments about the probability of loss or about the
estimates of amounts involved. Changes in these assessments may lead
to changes in the amount recorded for provisions. In addition, the
actual costs of resolving these claims may be substantially higher or
lower than the amounts recognized. The Bank reviews its legal provi-
sions on a case-by-case basis after considering, among other factors,
the progress of each case, the Bank’s experience, the experience of
others in similar cases, and the opinions and views of legal counsel.
INSURANCE
The assumptions used in establishing the Bank’s insurance claims and
policy benefit liabilities are based on best estimates of possible outcomes.
For property and casualty insurance, the ultimate cost to the Bank
will vary from the assumptions used to determine the liabilities
recognized, as additional information with respect to the facts and
circumstance of each claim incurred is incorporated into the liability.
For life and health insurance, actuarial liabilities consider all future
policy cash flows, including premiums, claims, and expenses required
to administer the policies.
The Bank’s mortality assumptions have been derived from a combi-
nation of its own experience and industry experience. Policyholders
may allow their policies to lapse by choosing not to continue to pay
premiums. The Bank bases its estimates of future lapse rates on previ-
ous experience when available, or industry experience. Estimates of
future policy administration expenses are based on the Bank’s previous
and expected future experience.
CONSOLIDATION OF SPECIAL PURPOSE ENTITITES
Management judgment is required when assessing whether the Bank
should consolidate an entity, particularly complex entities. An example
of such judgment is to determine whether an entity meets the definition
of an SPE, and if so, whether all the relevant facts and circumstances,
when considered together, would indicate that the Bank controls such
an SPE, including an analysis of the Bank’s exposure to the risks and
rewards of the SPE. These judgments are discussed further in Note 3
to the 2012 Consolidated Financial Statements.