The following table summarizes the potential effect of using reasonably possible alternative assumptions for financial assets and financial liabilities held, that are classified in Level 3 of the fair value hierarchy as at October 31. 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 spreads. For equity derivatives, the sensitivity was calculated by
Sensitivity Analysis of Level 3 Financial Assets and Liabilities (millions of Canadian dollars)
October 31, 2016
Decrease in fair value
FINANCIAL ASSETS Trading loans, securities, and other
Government and government-related securities Canadian government debt Federal
Equity securities Common shares
Retained interests
Derivatives Equity contracts
Financial assets designated at fair value through profit or loss Securities
Available-for-sale securities
Other debt securities Corporate and other debt
Equity securities Common shares Preferred shares
Debt securities reclassified from trading
FINANCIAL LIABILITIES Trading deposits
Derivatives Interest rate contracts Equity contracts
Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short Total
The best evidence of a financial instrument’s fair value at initial recognition 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 difference 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 significant non-observable
2
42 16 –
60 15
27 31
58 1 –
$ 156 2
12 5 –
19 23
18 27
45 1 –
$ 110 3
52 5 4
64 13
29 54
83 2 1
$ 195 3
16 5 4
28 17
14 40
54 2 1
$ 141
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 transaction price and the amount determined using valuation techniques with significant non-observable market inputs at initial recognition.
(millions of Canadian dollars)
Balance as at beginning of year New transactions
Recognized in the Consolidated Statement of Income during the year
Balance as at end of year
For the years ended October 31 2016 $ 30
2015 $ 33
69 (58) $ 41 57 (60) $ 30
$ 1 –
2 3
14 14
5 5
$ 1 –
– 1
16 16
5 5
$ – 6
2 8
24 24
– –
$ – 6
– 6
33 33
– –
Impact to net assets Increase in
fair value
Decrease in fair value
using reasonably possible alternative assumptions by shocking dividends, correlation, or the price and volatility of the underlying equity instrument. For available-for-sale equity securities, the sensitivity was calculated based on an upward and downward shock of the fair value reported. For trading deposits, the sensitivity was calculated by varying unobservable inputs which may include volatility, credit spreads, and correlation.
As at
October 31, 2015 Impact to net assets Increase in
fair value
TD BANK GROUP ANNUAL REPORT 2016 FINANCIAL RESULTS 145
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