Fair value measurement of derivatives
Key audit matter
TD describes its significant accounting judgments,
estimates, and assumptions in relation
to the fair value measurement of
derivatives in Note 3 of the consolidated financial
statements. As disclosed in Note 5 of the consolidated
financial statements, TD
has derivative assets of $78,061 million and
derivative liabilities of $68,368 million recorded
at fair value. Certain of these
derivatives are complex and illiquid and require
valuation techniques that may include complex
models and non-observable inputs,
requiring management’s estimation and judgment.
Auditing the valuation of certain derivatives required
the application of significant auditor judgment
and involvement of valuation
specialists in assessing the complex
models and non-observable inputs used. Certain
valuation inputs used to determine fair
value
that may be non-observable include volatilities,
correlations, and credit spreads. The
valuation of certain derivatives is sensitive
to
these inputs as they are forward-looking and
could be affected by future economic and market
conditions.
How our audit
key audit matter
We obtained an understanding, evaluated the design,
and tested the operating effectiveness of
management’s controls, including
the associated controls over relevant IT systems,
over the valuation of TD’s derivative portfolio.
The controls we tested included,
amongst others, the controls over the
suitability and mechanical accuracy of models
used in the valuation of derivatives,
and
controls over management’s independent assessment
of fair values, including the integrity of data
used in the valuation such as the
significant inputs noted above.
To test the valuation of these derivatives, our audit procedures included,
amongst others, an evaluation of the
methodologies and
significant inputs used by TD. With the assistance
of our valuation specialists, we performed
an independent valuation for a sample
of derivatives to assess the modelling assumptions
and significant inputs used to estimate
the fair value, which involved obtaining
significant inputs from independent external
sources, where available. We also assessed
the adequacy of the disclosures related to
the fair value measurement of derivatives.
Measurement of provision for uncertain
tax positions
Key audit matter
TD describes its significant accounting judgments,
estimates, and assumptions in relation
to income taxes in Note 3 and Note 24 of
the consolidated financial statements. As a
financial institution operating in multiple jurisdictions,
TD is subject to complex and
constantly evolving tax legislation. Uncertainty
in a tax position may arise as tax laws are
subject to interpretation. TD uses
significant judgment in i) determining whether
it is probable that TD will have to make
a payment to tax authorities upon their
examination of certain uncertain tax positions
and ii) measuring the amount
of the provision.
Auditing TD’s provision for uncertain tax positions
involved the application of judgment and
is based on interpretation of tax
legislation and jurisprudence.
How our audit
key audit matter
We obtained an understanding, evaluated the design,
and tested the operating effectiveness of
management’s controls over TD’s
provision for uncertain tax positions.
The controls we tested included, amongst others,
the controls over the assessment of the
technical merits of tax positions and management’s
process to measure the provision for
uncertain tax positions.
With the assistance of our tax professionals,
we assessed the technical merits and the
amount recorded for uncertain tax positions.
Our audit procedures included, amongst others,
using our knowledge of, and experience
with, the application of tax laws by the
relevant income tax authorities to evaluate
TD’s interpretations and assessment of tax laws
with respect to uncertain tax positions.
We assessed the implications of correspondence
received by TD from the relevant
tax authorities and evaluated income tax
opinions or other third-party advice obtained.
We also assessed the adequacy of the disclosures
related to uncertain tax positions.
Valuation of Goodwill in the U.S. Personal and Commercial
Banking group of Cash Generating
Units
Key audit matter
TD describes its significant accounting judgments,
estimates, and assumptions in relation
to the recoverable amount of its cash
generating units (‘CGU”) or group of
CGUs to which goodwill has been allocated
in Note 3 of the consolidated financial
statements.
As disclosed in Note 14 of the consolidated
financial statements, TD has $14,663
million of goodwill in the U.S. Retail segment,
which predominantly relates to the U.S.
Personal and Commercial Banking group
of cash generating units (“US P&C
CGUs”).
Goodwill is assessed for impairment annually, or more frequently
if impairment indicators are present.
Auditing the recoverable amount for the
U.S. P&C CGUs was complex and required
the application of significant auditor judgment
and involvement of valuation specialists in
assessing certain significant assumptions
in the impairment test. Significant assumptions
in the estimate of the recoverable amount
included the discount rate and certain
forward-looking assumptions, such as
the terminal
growth rate, and forecasted earnings, which
are affected by expectations about future
market or economic conditions.
How our audit
key audit matter
We obtained an understanding, evaluated the design,
and tested the operating effectiveness of
management’s controls over the
recoverable amount of TD’s U.S. P&C CGUs.
The controls we tested included, amongst
others, the controls over management’s
review of TD’s forecast as well as controls over
management’s review of the model and methodology
over significant assumptions
such as the discount rate and the terminal
growth rate. We also tested controls over
management’s review of the integrity of the
data used and the mathematical accuracy
of their valuation model.
To test the estimated recoverable amount of the U.S. P&C CGUs, our audit
procedures included, amongst others, with
the
assistance of our valuation specialists, assessing
the methodology and testing the significant
assumptions and underlying data used
by TD in its assessment. We considered the
selection and application of the discount
rate by evaluating the inputs and
mathematical accuracy of the calculation,
while also developing an independent estimate
and comparing it to the discount rate
selected by management. We considered the
selection and application of the terminal
growth rate by evaluating the selected rate
against relevant market and economic forecast
data. We evaluated the reasonability of the
forecasted earnings by comparing to
historical results and considering our current
understanding of the business as well as
current economic trends. We assessed the
historical accuracy of management’s prior year
estimates by performing a comparison of
management’s prior year projections to
actual results. We performed sensitivity analysis
on the significant assumptions to consider
the impact of changes in the recoverable
amount that would result from changes in
the assumptions. We also assessed the
adequacy of the disclosures related
to the
valuation of goodwill.
