TD Bank 2014 Annual Report Download - page 146

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS144
Subordinated Notes and Debentures
The fair value of subordinated notes and debentures are based on
quoted market prices for similar issues or current rates offered to the
Bank for debt of equivalent credit quality and remaining maturity.
Other Financial Liabilities Designated at Fair Value
For deposits designated at fair value through profit or loss, fair value
is determined using discounted cash flow valuation techniques which
maximize the use of observable market inputs such as benchmark yield
curves. The Bank considers the impact of its own creditworthiness in
the valuation of these deposits by reference to observable market
inputs. The Bank currently issues mortgage loan commitments to its
customers which allow them to lock in a fixed mortgage rate prior
to their expected funding date. The Bank values loan commitments
through the use of an option pricing model and with adjustments
calculated using an expected funding ratio to arrive at the most repre-
sentative fair value. The expected funding ratio represents the Bank’s
best estimate, based on historical analysis, as to the amount of loan
commitments that will actually fund. If commitment extensions are
exercised by the borrower, the Bank will remeasure the written option
at fair value.
Portfolio Exception
IFRS 13 provides a measurement exception that allows an entity to
determine the fair value of a group of financial assets and liabilities
with offsetting risks based on the sale or transfer of its net exposure
to a particular risk or risks. The Bank manages certain financial
assets and financial liabilities, such as derivative assets and derivative
liabilities on the basis of net exposure and applies the portfolio
exception when determining the fair value of these financial assets
and financial liabilities.
Fair Value of Assets and Liabilities not Measured at Fair Value
The fair value of assets and liabilities not measured at fair value
include loans, deposits, certain securitization liabilities, certain securities
purchased and obligations relating to securities sold under reverse
repurchase and repurchase agreements and subordinated notes and
debentures. For these instruments, fair values are calculated for
disclosure purposes only, and the valuation techniques are disclosed
above. In addition, the Bank has determined that the carrying value
approximates the fair value for the following assets and liabilities as
they are usually liquid floating rate financial instruments and are
generally short term in nature: cash and due from banks, interest-
bearing deposits with banks, customers’ liability under acceptances,
and acceptances.
Carrying Value and Fair Value of Financial Instruments
and Commodities
The fair values in the following table exclude the value of assets that
are not financial instruments, such as land, buildings and equipment,
as well as goodwill and other intangible assets, including customer
relationships, which are of significant value to the Bank. The following
table includes the fair value of commodities.
In the fourth quarter of 2014, the Bank implemented funding
valuation adjustment (FVA) in response to growing evidence that
market implied funding costs and benefits are now considered in the
pricing and fair valuation of uncollateralized derivatives. Some of the
key drivers of FVA include the market implied cost of funding spread
over LIBOR, expected term of the trade, and expected average expo-
sure by counterparty. FVA is further adjusted to account for the extent
to which the funding cost is incorporated into observed traded levels
and to calibrate to the expected term of the trade.
The FVA applies to both assets and liabilities, but the adjustment
in the fourth quarter largely relates to uncollateralized derivative assets
given the impact of the Bank’s own credit risk, which is a significant
component of the funding costs, is already incorporated in the valua-
tion of uncollateralized derivative liabilities through the application of
debit valuation adjustments (DVAs).
FVA was implemented on a prospective basis as a change in
accounting estimate and resulted in a $69 million charge during the
fourth quarter. There were no changes to the leveling in the fair value
hierarchy as a result of the implementation of FVA. The Bank will
continue to monitor industry practice, and may refine the methodology
and the products to which FVA applies to as market practices evolve.
Deposits
The estimated fair value of term deposits is determined by discounting
the contractual cash flows using interest rates currently offered for
deposits with similar terms.
For deposits with no defined maturities, the Bank considers fair
value to equal carrying value, which is equivalent to the amount
payable on the balance sheet date.
For trading deposits, fair value is determined using discounted cash
flow valuation techniques which maximize the use of observable
market inputs such as benchmark yield curves and foreign exchange
rates. The Bank considers the impact of its own creditworthiness in the
valuation of these deposits by reference to observable market inputs.
Securitization Liabilities
The fair value of securitization liabilities is based on quoted market
prices or quoted market prices for similar financial instruments, where
available. Where quoted prices are not available, fair value is determined
using valuation techniques, which maximize the use of observable
inputs, such as Canada Mortgage Bond (CMB) prices.
Obligations Related to Securities Sold Short
The fair value of these obligations is based on the fair value of the
underlying securities, which can include equity or debt securities. As
these obligations are fully collateralized, the method used to determine
fair value would be the same as that of the relevant underlying equity
or debt securities.
Securities Purchased Under Reverse Repurchase Agreements
and Obligations Related to Securities Sold under
Repurchase Agreements
Commodities purchased or sold with an agreement to sell or repur-
chase them at a later date at a fixed price are carried at fair value on
the Consolidated Balance Sheet. The fair value of these agreements
is based on valuation techniques such as discounted cash flow models
which maximize the use of observable market inputs such as interest
rate swap curves and commodity forward prices.