TD Bank 2014 Annual Report Download - page 136

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS134
If the Bank neither transfers nor retains substantially all the risks
and rewards of ownership of the financial asset, the Bank derecognizes
the financial asset where it has relinquished control of the financial
asset. The Bank is considered to have relinquished control of the
financial asset where the transferee has the practical ability to sell
the transferred financial asset. Where the Bank has retained control of
the financial asset, it continues to recognize the financial asset to the
extent of its continuing involvement in the financial asset. Under these
circumstances, the Bank usually retains the rights to future cash flows
relating to the asset through a residual interest and is exposed to some
degree of risk associated with the financial asset.
The derecognition criteria are also applied to the transfer of part of
an asset, rather than the asset as a whole, or to a group of similar
financial assets in their entirety, when applicable. If transferring a
part of an asset, it must be a specifically identified cash flow, a fully
proportionate share of the asset, or a fully proportionate share of
a specifically identified cash flow.
Securitization
Securitization is the process by which financial assets are transformed
into securities. The Bank securitizes financial assets by transferring
those financial assets to a third party and as part of the securitization,
certain financial assets may be retained and may consist of an interest-
only strip and, in some cases, a cash reserve account (collectively
referred to as “retained interests”). If the transfer qualifies for derecog -
nition, a gain or loss is recognized immediately in other income after
the effects of hedges on the assets sold, if applicable. The amount of
the gain or loss is calculated as the difference between the carrying
amount of the asset transferred and the sum of any cash proceeds
received, including any financial asset received or financial liability
assumed, and any cumulative gain or loss allocated to the transferred
asset that had been recognized in other comprehensive income. To
determine the value of the retained interest initially recorded, the
previous carrying value of the transferred asset is allocated between
the amount derecognized from the balance sheet and the retained
interest recorded, in proportion to their relative fair values on the
date of transfer. Subsequent to initial recognition, as market prices
are generally not available for retained interests, fair value is deter-
mined by estimating the present value of future expected cash flows
using management’s best estimates of key assumptions that market
participants would use in determining fair value. Refer to Note 3 for
assumptions used by management in determining the fair value of
retained interests. Retained interest is classified as trading securities
with subsequent changes in fair value recorded in trading income.
Where the Bank retains the servicing rights, the benefits of servicing
are assessed against market expectations. When the benefits of servicing
are more than adequate, a servicing asset is recognized. Similarly,
when the benefits of servicing are less than adequate, a servicing liability
is recognized. Servicing assets and servicing liabilities are initially
recognized at fair value and subsequently carried at amortized cost.
Financial Liabilities
The Bank derecognizes a financial liability when the obligation under
the liability is discharged, cancelled, or expires. If an existing financial
liability is replaced by another financial liability from the same lender
on substantially different terms or where the terms of the existing
liability are substantially modified, the original liability is derecognized
and a new liability is recognized with the difference in the respective
carrying amounts recognized on the Consolidated Statement of Income.
DETERMINATION OF FAIR VALUE
The fair value of a financial instrument on initial recognition is normally
the transaction price, such as the fair value of the consideration given
or received. The best evidence of fair value is quoted prices in active
markets. When financial assets and liabilities have offsetting market
risks or credit risks, the Bank applies the portfolio exception, as
described in Note 5, and uses mid-market prices as a basis for estab-
lishing fair values for the offsetting risk positions and applies the most
representative price within the bid-ask spread to the net open position,
as appropriate. When there is no active market for the instrument, the
fair value may be based on other observable current market transac-
tions 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.
The Bank recognizes various types of valuation adjustments to
account for factors that market participants would use in determining
fair value which are not included in valuation techniques due to system
limitations or measurement uncertainty. Valuation adjustments reflect
the Bank’s assessment of factors that market participants would use
in pricing the asset or liability. These include, but are not limited to,
the unobservability of inputs used in the pricing model, or assumptions
about risk, such as creditworthiness of each counterparty and risk
premiums that market participants would require given the inherent
risk in the pricing model.
If there is a difference between the initial transaction price and the
value based on a valuation technique which includes observable
market inputs, the difference is referred to as inception profit or loss.
Inception profit or loss is recognized in income upon initial recognition
of the instrument. When an instrument is measured using a valuation
technique that utilizes non-observable inputs, it is initially valued at the
transaction price, which is considered the best estimate of fair value.
Subsequent to initial recognition, any difference between the transac-
tion price and the value determined by the valuation technique at
initial recognition is recognized in income as non-observable inputs
become observable.
If the fair value of a financial asset measured at fair value becomes
negative, it is recognized as a financial liability until either its fair value
becomes positive, at which time it is recognized as a financial asset, or
until it is extinguished.
DERECOGNITION OF FINANCIAL INSTRUMENTS
Financial Assets
The Bank derecognizes a financial asset when the contractual rights to
that asset have expired. Derecognition may also be appropriate where
the contractual right to receive future cash flows from the asset have
been transferred, or where the Bank retains the rights to future cash
flows from the asset, but assumes an obligation to pay those cash
flows to a third party subject to certain criteria.
When the Bank transfers a financial asset, it is necessary to assess
the extent to which the Bank has retained the risks and rewards of
ownership of the transferred asset. If substantially all the risks and
rewards of ownership of the financial asset have been retained, the
Bank continues to recognize the financial asset and also recognizes a
financial liability for the consideration received. Certain transaction
costs incurred are also capitalized and amortized using EIRM. If
substantially all the risks and rewards of ownership of the financial
asset have been transferred, the Bank will derecognize the financial
asset and recognize separately as assets or liabilities any rights and
obligations created or retained in the transfer. The Bank determines
whether substantially all the risk and rewards have been transferred
by quantitatively comparing the variability in cash flows before and
after the transfer. If the variability in cash flows does not change
significantly as a result of the transfer, the Bank has retained substan-
tially all of the risks and rewards of ownership.