TD Bank 2014 Annual Report Download - page 135

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS 133
Net Investment Hedges
Hedges of net investments in foreign operations are accounted for
similar to cash flow hedges. The change in fair value on the hedging
instrument relating to the effective portion is recognized in other
comprehensive income. The change in fair value of the hedging instru-
ment relating to the ineffective portion is recognized immediately on
the Consolidated Statement of Income. Gains and losses accumulated
in other comprehensive income are reclassified to the Consolidated
Statement of Income upon the disposal or partial disposal of the
investment in the foreign operation.
Embedded Derivatives
Derivatives may be embedded in other financial instruments (the host
instrument). Embedded derivatives are treated as separate derivatives
when their economic characteristics and risks are not closely related to
those of the host instrument, a separate instrument with the same
terms as the embedded derivative would meet the definition of a
derivative, and the combined contract is not held for trading or desig-
nated at fair value through profit or loss. These embedded derivatives,
which are bifurcated from the host contract, are recognized on the
Consolidated Balance Sheet as Derivatives and measured at fair value
with subsequent changes recognized in Non-interest income on the
Consolidated Statement of Income.
TRANSLATION OF FOREIGN CURRENCIES
The Bank’s Consolidated Financial Statements are presented in Canadian
dollars, which is the presentation currency of the Bank. Items included
in the financial statements of each of the Bank’s entities are measured
using their functional currency, which is the currency of the primary
economic environment in which they operate.
Monetary assets and liabilities denominated in a currency that differs
from an entity’s functional currency are translated into the functional
currency of the entity at exchange rates prevailing at the balance sheet
date. Non-monetary assets and liabilities are translated at historical
exchange rates. Income and expenses are translated into an entity’s
functional currency at average exchange rates prevailing throughout
the year. Translation gains and losses are included in non-interest
income except for available-for-sale equity securities where unrealized
translation gains and losses are recorded in other comprehensive
income until the asset is sold or becomes impaired.
Foreign-currency denominated subsidiaries are those with a
functional currency other than Canadian dollars. For the purpose of
translation into the Bank’s functional currency, all assets and liabilities
are translated at exchange rates in effect at the balance sheet date
and all income and expenses are translated at average exchange rates
for the period. Unrealized translation gains and losses relating to these
operations, net of gains or losses arising from net investment hedges
of these positions and applicable income taxes, are included in other
comprehensive income. Translation gains and losses accumulated
in other comprehensive income are recognized on the Consolidated
Statement of Income upon the disposal or partial disposal of the
investment in the foreign operation. The investment balance of foreign
entities accounted for by the equity method, including TD Ameritrade,
is translated into Canadian dollars using the closing rate at the end
of the period with exchange gains or losses recognized in other
comprehensive income.
OFFSETTING OF FINANCIAL INSTRUMENTS
Financial assets and liabilities are offset, with the net amount
presented on the Consolidated Balance Sheet, only if the Bank
currently has a legally enforceable right to set off the recognized
amounts, and intends either to settle on a net basis or to realize the
asset and settle the liability simultaneously. In all other situations,
assets and liabilities are presented on a gross basis.
Changes in fair value relating to the derivative component excluded
from the assessment of hedge effectiveness, is recognized immediately
in Non-interest income on the Consolidated Statement of Income.
When derivatives are designated as hedges, the Bank classifies them
either as: (1) hedges of the changes in fair value of recognized assets
or liabilities or firm commitments (fair value hedges); (2) hedges of
the variability in highly probable future cash flows attributable to a
recognized asset or liability, or a forecasted transaction (cash flow
hedges); or (3) hedges of net investments in a foreign operation (net
investment hedges).
Fair Value Hedges
The Bank’s fair value hedges principally consist of interest rate swaps
that are used to protect against changes in the fair value of fixed-
rate long-term financial instruments due to movements in market
interest rates.
Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recognized in Non-interest
income on the Consolidated Statement of Income, along with changes
in the fair value of the assets, liabilities, or group thereof that are
attributable to the hedged risk. Any change in fair value relating to
the ineffective portion of the hedging relationship is recognized
immediately in non-interest income.
The cumulative adjustment to the carrying amount of the hedged
item (the basis adjustment) is amortized to the Consolidated Statement
of Income in net interest income based on a recalculated EIR over
the remaining expected life of the hedged item, with amortization
beginning no later than when the hedged item ceases to be adjusted
for changes in its fair value attributable to the hedged risk. Where
the hedged item has been derecognized, the basis adjustment is
immediately released to Net interest income on the Consolidated
Statement of Income.
Cash Flow Hedges
The Bank is exposed to variability in future cash flows that are
denominated in foreign currencies, as well as the variability in future
cash flows on non-trading assets and liabilities that bear interest at
variable rates, or are expected to be reinvested in the future. The
amounts and timing of future cash flows are projected for each
hedged exposure on the basis of their contractual terms and other
relevant factors, including estimates of prepayments and defaults.
The effective portion of the change in the fair value of the derivative
that is designated and qualifies as a cash flow hedge is recognized in
other comprehensive income. The change in fair value of the derivative
relating to the ineffective portion is recognized immediately in non-
interest income.
Amounts accumulated in other comprehensive income are reclassi-
fied to Net interest income or Non-interest income, as applicable, on
the Consolidated Statement of Income in the period in which the
hedged item affects income, and are reported in the same income
statement line as the hedged item.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain or
loss existing in other comprehensive income at that time remains in
other comprehensive income until the forecasted transaction impacts
the Consolidated Statement of Income. When a forecasted transaction
is no longer expected to occur, the cumulative gain or loss that was
reported in other comprehensive income is immediately reclassified to
Net interest income or Non-interest income, as applicable, on the
Consolidated Statement of Income.