TD Bank 2014 Annual Report Download - page 103

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS 101
ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Estimates
The Bank’s accounting policies are essential to understanding its
results of operations and financial condition. A summary of the Bank’s
significant accounting policies and estimates are presented in the
Notes to the 2014 Consolidated Financial Statements. Some of the
Bank’s policies require subjective, complex judgments and estimates
as they relate to matters that are inherently uncertain. Changes in
these judgments or estimates could have a significant impact on the
Bank’s 2014 Consolidated Financial Statements. The Bank has estab-
lished procedures to ensure that accounting policies are applied
consistently and that the processes for changing methodologies are
well controlled and occur in an appropriate and systematic manner.
In addition, the Bank’s critical accounting policies are reviewed with
the Audit Committee on a periodic basis. Critical accounting policies
that require management’s judgment and estimates include account-
ing for impairments of financial assets, the determination of fair value
of financial instruments, accounting for derecognition, the valuation
of goodwill and other intangibles, accounting for employee benefits,
accounting for income taxes, accounting for provisions, accounting
for insurance, and the consolidation of structured entities.
ACCOUNTING POLICIES AND ESTIMATES
The Bank’s 2014 Consolidated Financial Statements have been prepared
in accordance with IFRS. For details of the Bank’s accounting policies
and significant judgments, estimates, and assumptions under IFRS, see
Notes 2 and 3 to the Bank’s 2014 Consolidated Financial Statements.
ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
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 estimates
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 systematic manner.
IMPAIRMENT OF FINANCIAL ASSETS
Available-for-Sale Securities
Impairment losses are recognized on available-for-sale securities if
there is objective evidence of impairment as a result of one or more
events that have occurred after initial recognition and the loss event(s)
results in a decrease in the estimated cash flows of the instrument.
The Bank individually reviews these securities at least quarterly for the
presence of these conditions. For available-for-sale equity securities,
a significant or prolonged decline in fair value below cost is considered
objective evidence of impairment. For available-for-sale debt securities,
a deterioration of credit quality is considered objective evidence of
impairment. 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.
Held-to-Maturity Securities
Impairment losses are recognized on held-to-maturity securities if there
is objective evidence of impairment as a result of one or more events
that have occurred after initial recognition 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 impairment at the coun-
terparty-specific level. If there is no objective evidence of impairment
at the counterparty-specific level then the security is grouped with
other held-to-maturity securities with similar credit risk characteristics
and collectively assessed for impairment, which considers losses
incurred but not identified. A deterioration of credit quality is consid-
ered objective evidence of impairment. Other factors considered in the
impairment assessment include the financial position and key financial
indicators of the issuer, 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 deteri-
oration of credit quality subsequent to the initial recognition of the
loan to the extent the Bank no longer has reasonable assurance 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. The allowance for credit losses repre-
sents management’s best estimate of impairment incurred in the
lending portfolios, including any off-balance sheet exposures, at the
balance sheet date. Management exercises judgment as to the timing
of designating a loan as impaired, the amount of the allowance
required, and 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 expe-
rience, 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 or similar 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.