TD Bank 2014 Annual Report Download - page 144

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS142
Novation of Derivatives and Continuation of Hedge Accounting
In June 2013, the IASB issued amendments to IAS 39 which provides
relief from discontinuing hedge accounting when novation of a
derivative designated as a hedge accounting instrument meets certain
criteria. The IAS 39 amendments are effective for annual periods
beginning on or after January 1, 2014, which will be November 1,
2014, for the Bank, and is to be applied retrospectively. The IAS 39
amendments are not expected to have a material impact on the
financial position, cash flows, or earnings of the Bank and have been
retained in the final version of IFRS 9.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with
Customers, which clarifies the principles for recognizing revenue and
cash flows arising from contracts with customers. The standard is
effective for annual periods beginning on or after January 1, 2017,
which will be November 1, 2017, for the Bank, and is to be applied
retrospectively. The Bank is currently assessing the impact of adopting
this standard.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, Financial
Instruments (IFRS 9), which replaces the guidance in IAS 39, Financial
Instruments: Recognition and Measurement (IAS 39). This final version
includes requirements on: (1) Classification and measurement of finan-
cial assets and liabilities; (2) Impairment; and (3) Hedge accounting.
Accounting for macro hedging has been decoupled from IFRS 9 and
will now be considered and issued as a separate standard. IFRS 9 is
effective for annual periods beginning on or after January 1, 2018,
which will be November 1, 2018, for the Bank, and is to be applied
retrospectively with certain exceptions. Early adoption of IFRS 9 is
permitted. IFRS 9 also permits early application of changes in the own
credit risk provision, prior to adopting all other requirements within
IFRS 9. The Bank is currently assessing the impact of adopting IFRS 9,
including early application of the own credit risk provision.
FAIR VALUE MEASUREMENTS
NOTE 5
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.
VALUATION GOVERNANCE
Valuation processes are guided by policies and procedures that are
approved by senior management and subject matter experts. Senior
Executive oversight over the valuation process is provided through vari-
ous valuation-related committees. Further, the Bank has a number of
additional controls in place, including an independent price verification
process to ensure the accuracy of fair value measurements reported in
the financial statements. The sources used for independent pricing
comply with the standards set out in the approved valuation-related
policies, which includes consideration of the reliability, relevancy, and
timeliness of data.
METHODS AND ASSUMPTIONS
The Bank calculates fair values for measurement and disclosure purposes
based on the following methods of valuation and assumptions:
Government and Government-Related Securities
The fair value of Canadian government debt securities is based on
quoted prices in active markets, where available. Where quoted prices
are not available, valuation techniques such as discounted cash flow
models may be used, which maximize the use of observable inputs
such as government yield curves.
The fair value of U.S. federal and state government, as well as
agency debt securities, is determined by reference to recent transaction
prices, broker quotes, or third-party vendor prices. Brokers or third-
party vendors may use a pool-specific valuation model to value these
securities. Observable market inputs to the model include to be
announced (TBA) market prices, the applicable indices, and metrics
such as the coupon, maturity, and weighted average maturity of the
pool. Market inputs used in the valuation model include, but are not
limited to, indexed yield curves and trading spreads.
Certain assets and liabilities, primarily financial instruments, are carried
on the balance sheet at their fair value on a recurring basis. These
financial instruments include trading loans and securities, assets and
liabilities designated at fair value through profit or loss, instruments
classified as available-for-sale, derivatives, certain securities purchased
under reverse repurchase agreements, certain deposits classified as
trading, securitization liabilities at fair value, obligations related to
securities sold short, and certain obligations related to securities sold
under repurchase agreements. All other financial assets are carried at
amortized cost and the fair value is disclosed as follows:
DETERMINATION OF FAIR VALUE
The fair value of financial instruments traded in active markets at the
balance sheet date is based on their available 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
methodology and the extent of change in those factors.