TD Bank 2014 Annual Report Download - page 154

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS152
spreads. For equity derivatives, the sensitivity was calculated by using
reasonably possible alternative assumptions by shocking dividends by
5%, correlation by 10%, or the price of the underlying equity instru-
ment by 10% and volatility from (13)% to 33%. For trading deposits,
the sensitivity was calculated by varying unobservable inputs which
may include volatility, credit spreads, and correlation.
The following table summarizes the potential effect of using reason-
ably possible alternative assumptions for financial assets and financial
liabilities held, as at October 31, that are classified in Level 3 of the
fair value hierarchy. For interest rate derivatives, the Bank performed
a sensitivity analysis on the unobservable implied volatility. For credit
derivatives, sensitivity was calculated on unobservable credit spreads
using assumptions derived from the underlying bond position credit
Sensitivity Analysis of Level 3 Financial Assets and Liabilities
(millions of Canadian dollars) As at
October 31, 2014
October 31, 2013
Impact to net assets
Impact to net assets
Decrease in Increase in Decrease in Increase in
fair value fair value fair value fair value
FINANCIAL ASSETS
Trading loans, securities, and other
Equity securities
Common shares $ – $ – $ 1 $ 1
Preferred shares – – – –
Retained interests 3 – 5 2
3 – 6 3
Derivatives
Interest rate contracts – – – –
Foreign exchange contracts – – – –
Equity contracts 21 22 30 35
21 22 30 35
Available-for-sale securities
Government and government related securities
Other OECD government guaranteed debt – – 1 1
Other debt securities
Corporate and other debt 2 – 2 –
Equity securities
Common shares 54 20 45 18
Preferred shares 8 8 7 7
Debt securities reclassified from trading 4 4 4 4
68 32 59 30
FINANCIAL LIABILITIES
Trading deposits 6 10 5 9
Derivatives
Interest rate contracts 20 16 23 17
Equity contracts 32 31 49 42
52 47 72 59
Other financial liabilities designated at fair value through profit or loss 1 1 2 2
Total $ 151 $ 112 $ 174 $ 138
(millions of Canadian dollars) For the years ended October 31
2014 2013
Balance as at beginning of year $ 41 $ 48
New transactions 44 32
Recognized in the Consolidated Statement
of Income during the year (52) (39)
Balance as at end of year $ 33 $ 41
FINANCIAL ASSETS AND LIABILITIES DESIGNATED
AT FAIR VALUE
Loans Designated at Fair Value through Profit or Loss
Certain business and government loans held within a trading portfolio
or economically hedged with derivatives are designated at fair value
through profit or loss if the relevant criteria are met. The fair value of
loans designated at fair value through profit or loss was $5 million as
at October 31, 2014 (October 31, 2013 – $9 million), which represents
their maximum credit exposure.
These loans are managed within risk limits that have been approved
by the Bank’s risk management group and are hedged for credit risk
with credit derivatives.
The best evidence of a financial instrument’s fair value at initial recog-
nition is its transaction price unless the fair value of the instrument
is evidenced by comparison with other observable current market
transactions in the same instrument (that is, without modification
or repackaging) or based on a valuation technique whose variables
include only data from observable markets. Consequently, the differ-
ence between the fair value using other observable current market
transactions or a valuation technique and the transaction price results
in an unrealized gain or loss at initial recognition.
The difference between the transaction price at initial recognition
and the value determined at that date using a valuation technique
is not recognized in income until the non-observable inputs in the
valuation technique used to value the instruments become observable.
The following table summarizes the aggregate difference yet to be
recognized in net income due to the difference between the transac-
tion price and the amount determined using valuation techniques
with non-observable market inputs at initial recognition.