TD Bank 2014 Annual Report Download - page 105

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS 103
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
provisions require the involvement of both the Bank’s management
and legal counsel when assessing the probability of a loss and estimat ing
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 provisions
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.
Certain of the Bank’s provisions relate to restructuring initiatives
initiated by the Bank to reduce costs in a sustainable manner and
achieve greater operational efficiencies. Restructuring provisions
require management’s best estimate, including forecasts of economic
conditions. Throughout the life of a provision, the Bank may become
aware of additional information that may impact the assessment of
amounts to be incurred. Changes in these assessments may lead to
changes in the amount recorded for provisions.
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 of claims liabil-
ities is estimated using a range of standard actuarial claims projection
techniques in accordance with Canadian accepted actuarial practices.
The main assumption underlying these techniques is that a company’s
past claims development experience can be used to project future
claims development and hence ultimate claims costs. As such, these
methods extrapolate the development of paid and incurred losses,
average costs per claim and claim numbers based on the observed
development of earlier years and expected loss ratios. Additional
qualitative judgment is used to assess the extent to which past trends
may or may not apply in the future, in order to arrive at the estimated
ultimate claims cost that present the most likely outcome taking
account of all the uncertainties involved.
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
previous 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 STRUCTURED ENTITIES
Management judgment is required when assessing whether the Bank
should consolidate an entity, particularly complex entities. For instance,
it may not be feasible to determine if the Bank controls an entity solely
through an assessment of voting rights for certain structured entities.
In this case, judgment is required to establish whether the Bank has
decision-making power over the key relevant activities of the entity
and whether the Bank has the ability to use that power to absorb
significant variable returns from the entity. If it is determined that the
Bank has both decision-making power and significant variable returns
from the entity, judgment is also used to determine whether any such
power is exercised by the Bank as principal, on its own behalf, or as
agent, on behalf of another counterparty.
Assessing whether the Bank has decision-making power includes
understanding the purpose and design of the entity in order to deter-
mine its key economic activities. In this context, an entity’s key economic
activities are those which predominantly impact the economic perfor-
mance of the entity. When the Bank has the current ability to direct
the entity’s key economic activities, it is considered to have decision-
making power over the entity.
The Bank also evaluates its exposure to the variable returns of
a structured entity in order to determine if it absorbs a significant
proportion of the variable returns the entity is designed to create.
As part of this evaluation, the Bank considers the purpose and design
of the entity in order to determine whether it absorbs variable returns
from the structured entity through its contractual holdings, which
may take the form of securities issued by the entity, derivatives with
the entity, or other arrangements such as guarantees, liquidity facili-
ties, or lending commitments.
If the Bank has decision-making power over and absorbs significant
variable returns from the entity it then determines if it is acting as prin-
cipal or agent when exercising its decision-making power. Key factors
considered include the scope of its decision-making powers; the rights
of other parties involved with the entity, including any rights to remove
the Bank as decision-maker or rights to participate in key decisions;
whether the rights of other parties are exercisable in practice; and the
variable returns absorbed by the Bank and by other parties involved
with the entity. When assessing consolidation, a presumption exists
that the Bank exercises decision-making power as principal if it is also
exposed to significant variable returns, unless an analysis of the factors
above indicates otherwise.
The decisions above are made with reference to the specific facts
and circumstances relevant for the structured entity and related
transaction(s) under consideration.