TD Bank 2014 Annual Report Download - page 140

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS138
rewards of ownership of the financial asset has been retained or trans-
ferred. If the Bank neither transfers nor retains substantially all of the
risks and rewards of ownership of the financial asset, a decision must
be made as to whether the Bank has retained control of the financial
asset. Upon derecognition, the Bank will record a gain or loss on sale
of those assets which is calculated as the difference between the carry-
ing 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. In
determining the fair value of any financial asset received, the Bank
estimates future cash flows by relying on estimates of the amount of
interest that will be collected on the securitized assets, the yield to be
paid to investors, the portion of the securitized assets that will be
prepaid before their scheduled maturity, expected credit losses, the
cost of servicing the assets and the rate at which to discount these
expected future cash flows. Actual cash flows may differ significantly
from those estimated by the Bank. Retained interests are classified as
trading securities and are initially recognized at relative fair value on
the Bank’s Consolidated Balance Sheet. Subsequently, the fair value of
retained interests recognized by the Bank is determined by estimating
the present value of future expected cash flows using management’s
best estimates of key assumptions including credit losses, prepayment
rates, forward yield curves and discount rates, that are commensurate
with the risks involved. Differences between the actual cash flows and
the Bank’s estimate of future cash flows are recognized in income.
These assumptions are subject to periodic review and may change due
to significant changes in the economic environment.
GOODWILL AND OTHER INTANGIBLES
The fair value of the Bank’s cash generating unit (CGU) is determined
from internally developed valuation models that consider various
factors and assumptions such as forecasted earnings, growth rates,
price-earnings multiples, discount rates, and terminal multiples.
Management is required to use judgment in estimating the fair value
of CGUs, and the use of different assumptions and estimates in the
fair value calculations could influence the determination of the exis-
tence of impairment and the valuation of goodwill. Management
believes that the assumptions and estimates used are reasonable and
supportable. Where possible, fair values generated internally are
compared to relevant market information. The carrying amounts of the
Bank’s CGUs are determined by management using risk based capital
models to adjust net assets and liabilities by CGU. These models
consider various factors including market risk, credit risk, and opera-
tional risk, including investment capital (comprised of goodwill and
other intangibles). Any unallocated capital not directly attributable
to the CGUs is held within the Corporate segment. The Bank’s
capital oversight committees provide oversight to the Bank’s capital
allocation methodologies.
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 discount rates,
compensation increases, health care cost trend rates, and mortality
rates 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 conjunction with market-related
data and considers if the market-related data indicates there is any
prolonged or significant impact on the assumptions. The discount rate
used to measure plan obligations is based on long-term high quality
corporate bond yields as at October 31. The other assumptions are
also long-term estimates. All assumptions are subject to a degree of
uncertainty. Differences between actual experiences and the assump-
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 experi-
ence, 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.
For certain complex or illiquid financial instruments, fair value is
determined using valuation techniques in which current market trans-
actions or observable market inputs are not available. Determining
which valuation technique to apply requires judgment. The valuation
techniques themselves also involve some level of estimation and judg-
ment. The judgments include liquidity considerations and model inputs
such as volatilities, correlations, spreads, discount rates, pre-payment
rates, and prices of underlying instruments. Any imprecision in these
estimates can affect the resulting fair value.
The inherent nature of private equity investing is that the Bank’s
valuation may change over time due to developments in the business
underlying the investment. Such fluctuations may be significant
depending on the nature of the factors going into the valuation meth-
odology and the extent of change in those factors.
Judgment is also used in recording fair value adjustments to model
valuations to account for measurement uncertainty when valuing
complex and less actively traded financial instruments. If the market
for a complex financial instrument develops, the pricing for this
instrument may become more transparent, resulting in refinement
of valuation models.
An analysis of fair values of financial instruments and further details
as to how they are measured are provided in Note 5.
DERECOGNITION
Certain assets transferred may qualify for derecognition from the
Bank’s Consolidated Balance Sheet. To qualify for derecognition
certain key determinations must be made. A decision must be made as
to whether the rights to receive cash flows from the financial assets
has been retained or transferred and the extent to which the risks and