CONSIDERACIONES EN TORNO AL LENGUAJE.
2.2.6.1.2 TEORÍA INNATATISTA
related accrual for interest and penalties) from October 31, 2009 to October 31, 2010 is as follows:
Reconciliation of the Change in Unrecognized Tax Benefits
Balance, October 31, 2009 $1,007
Add: Increases related to positions taken during prior years 31
Add: Increases related to positions taken during the current year 201
Less: Expiration of statute of limitations (74)
Less: Settlements (29)
Less: Foreign exchange and other (4)
Less: Decreases related to positions taken during prior years (123)
Balance, October 31, 2010 $1,009
As at October 31, 2010 and 2009, the balances of our UTBs, excluding any related accrual for interest and penalties, were $1,009 million and $1,007 million, respectively, of which $1,005 million and $988 million, respectively, if recognized, would affect our effective tax rate. It is difficult to project how unrecognized tax benefits will change over the next 12 months.
Under Topic 740, we continue our policy of accruing income tax-related interest and penalties within income tax expense. As at October 31, 2010 and 2009, our accrual for interest and penalties that relate to income taxes, net of payments on deposit to taxing authorities, were $53 million and $40 million, respectively. There was a net increase of $13 million in the accrual for interest and penalties during the year ended October 31, 2010.
RBC are subject to Canadian federal and provincial income tax, U.S. federal, state and local income tax, and income tax in other foreign jurisdictions. The following are the major tax jurisdictions in which RBC operate and the earliest tax year subject to examination: Canada – 2006, United States – 2003 and United Kingdom – 2009. Framework on fair value measurement
Topic 820,Fair Value Measurements and Disclosures(Topic 820) (FASB Statement No. 157,Fair Value Measurementsand related pronouncements), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs to measure the fair values of its assets and liabilities and requires an entity to include the impact of its own credit risk in measuring derivatives and other liabilities measured at fair value. It also eliminates the deferral of unrealized gains or losses at inception on derivative instruments whose fair value is measured using unobservable market inputs and precludes the use of block discounts that were previously applied to large holdings of securities traded in an active market. On adoption, any unrealized gains or losses at inception and adjustments for block discounts, if any, had been recognized as a transition adjustment in retained earnings.
With the adoption of Topic 820, deferral of inception gains and losses previously required under U.S. GAAP is no longer required. Valuation adjustments for unrealized gains or losses at inception, recognized in accordance with the previous guidance, were reclassified into other valuation adjustment categories. The reclassification had no impact on the overall amount of valuation adjustments. The remaining balance of $38 million as at October 31, 2009, net of taxes, relating to the adjustment for unrealized gains or losses at inception has been recognized as a transition adjustment as an increase to our opening retained earnings under U.S. GAAP. Fair value hierarchy
Topic 820 prescribes a three-level fair value hierarchy for disclosure purposes based on the transparency of the inputs used to measure the fair values of assets and liabilities. Specific guidance under Topic 820, which became effective for us on May 1, 2009, provides additional factors to consider while measuring fair value when there
has been significant decrease in the level of market activity for an asset or a liability and to determine whether quoted prices are associated with transactions that are not considered to be orderly. It also expands the disclosure requirements of the fair value of financial instruments. Additional guidance under Topic 820 (ASU 2009-05, Measuring Fair Value Liabilities) specifies the valuation techniques that are required to be applied to measure fair value when a quoted price in an active market of an identical liability is not available.
Refer to Note 2 for the fair value hierarchy and the reconciliation of Level 3 financial instruments under Canadian GAAP. Balances of financial instruments in the U.S. GAAP fair value hierarchy differ from those of Canadian GAAP primarily due to non-cash collateral, trade- date accounting, election of the fair value option under Canadian GAAP for investments supporting the policy benefit liabilities on life and health insurance contracts as opposed to available-for-sale classification under U.S. GAAP, and joint ventures accounting. Refer to the Material balance sheet reconciling items table earlier in this note for the amounts of these reconciling differences.
Valuation models and inputs
Fair values of certain instruments classified as level 2 or 3 in the fair value hierarchy disclosure in Note 2 are determined using valuation models. The significant financial instruments below are valued using an income approach, and their significant inputs are primarily interest rate yield curves, correlation, commodity forward prices, currency forward points, dividend rates, and volatility rates for their respective currency and term to maturity. The following are some of the short and long-term model inputs we used:
• Interest rate inputs of commercial paper, Certificates of Deposit, Banker Acceptances, LIBOR loans, bank deposits, bank loans and bank notes include: (a) Bank deposits – .25% to .27% (U.S.) from one week to three months, (b) Bank loans and notes – .91% to 1.41% for Canadian instruments and .24% to .36% for U.S. instruments from less than one month to over six months, (c) Banker Acceptances – .98% to 1.34% from less than one month to over six months, (d) Certificate of Deposits – .30% (Swiss Franc) and .85% (Euro) for three months, (e) U.S. commercial paper – .30% to .32% from one week to three months, (f) Canadian commercial paper – 1.01% to 1.18% from one week to three months and (g) U.S. LIBOR loans – .24% to .36% from less than one month to over 6 months.
• Overnight interest rates of assets purchased under reverse repurchase agreements and obligations related to assets sold under repurchase agreements (pound sterling, Euro, Canadian, U.S. and Australian dollars) range from .23% to 3.00%, while the medium–term rates (one week) and long-term rates (one month) are from .25% to 4.51% and from .25% to 4.60%, respectively. • Interest rate inputs of the interest rate swaps are: (a) two to
20-year Canadian dollar swaps – 1.51% to 3.68%, (b) two to 20-year U.S. dollar swaps – .45% to 3.47%, (c) two to 30-year Japanese yen swaps – .38% to 1.90%, (d) two to 30-year pound sterling swaps – 1.28% to 3.87%, (e) two to 30-year Euro swaps – 1.59% to 2.97%, (f) two to 30-year Swiss Franc swaps – .53% to 1.87% and (g) two to 30-year Australian dollar swaps – 5.15% to 5.42%.
• Volatility inputs of non-vanilla interest rate options consist of: (a) one-month to 20-year Canadian dollar options – 29.67% to 12.18%, (b) one-month to 20-year U.S. dollar options – 106.2% to 17.5%, (c) one-month to 20-year Japanese yen options – 44.2% to 23.9% and (d) one-month to 20-year pound sterling options – 40.6% to 11.7%.
• Volatility inputs of vanilla interest rate options consist of: (a) one-month to 20-year Euro options – 40.5% to 26.7% and (b) 1 month to 25 year U.S. options – 134.0% to 26.0%. • Volatility inputs of one-month to 20-year Canadian dollar
swaptions range from 32% to 19%.
• Volatility inputs of over-the-counter currency options are: (a) six months to 5-year Canadian dollar options – 12.70% to 13.45%, (b) one to 20-year Japanese yen options – 13.60% to 19.55%, 140 Royal Bank of Canada: Annual Report 2010 Consolidated Financial Statements
(c) six months to 5-year pound sterling options – 12.50% to 14.20%, and (d) six months to 5-year Euro options – 14.02% to 12.70%.
• Number of basis points added to spot rate to calculate forward rate of the currency forward range from .21 points for overnight and 101.5 points for one year.
• Dividend rates of equity forwards and swaps comprise 0% to 3% for both 1.5 years and 3.5 years.
• Forward rates of gold are .42% for one month and .82% for one year.
• Correlation of 1.7 to 7.2-year Canadian and U.S. dollar CDOs range from 45.07% to 69.10% and from 40.00% to 41.77%, respectively.
Fair value measurement on non-financial assets and liabilities Guidance on fair value measurement and disclosures (Topic 820) for nonfinancial assets and liabilities became effective for us on November 1, 2009. Under the new guidance, fair value hierarchy model, as discussed above for financial instruments, are also applicable to assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Additional disclosures, if applicable, are also required to enable
users to assess inputs used to develop those measurements that are related to impairment and other fair value calculations.
Investments in certain entities that calculate net asset value per share Our alternative investments primarily include hedge funds held in connection with hedging of exposure related to fee-based equity derivative transactions with third parties. Fair value of these
investments is based on the net asset value of the hedge funds. As at October 31, 2010, the fair value of our investments in the U.S. domiciled and the non-U.S. domiciled hedge funds were $553 million and $2,021 million, respectively, and there were no unfunded commitments related to these funds. These U.S. domiciled and the non-U.S. domiciled hedge funds employ a broad variety of investment strategies using equities, fixed income securities and other financial instruments. The redemption provisions of such hedge funds generally (a) require notice periods ranging from 5 days to over 180 days, (b) allow redemptions on a weekly, monthly, quarterly, semi-annually or annual basis, (c) may have lockup provisions restricting the ability to redeem for the first 3 to 36 months from the date of investment and (d) often have mechanisms to gate or otherwise restrict redemptions notwithstanding (a) – (c) above.
Fair value option for financial assets and liabilities
Topic 825-10, which gives an entity the option to report selected financial assets and liabilities at fair value and establishes new disclosure requirements for assets and liabilities to which the fair value option is applied, became effective for us on November 1, 2008. The difference between the carrying amount and the fair value of the eligible items for which the fair value option was elected as at November 1, 2008 was included in opening retained earnings as a cumulative-effect adjustment which was an increase of $81 million after taxes.
Our accounting policy on electing the fair value option is described in Note 1 and in the ‘Material differences between
Canadian and U.S. GAAP’ section of this note. The following table presents the categories of financial assets and liabilities elected for fair value option in accordance with guidance under Topic 815-15-25, Derivatives and Hedging – Embedded Derivatives(FASB Statement No. 155,Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140) and Topic 825-10, as well as the difference between the aggregate fair value and the aggregate remaining contractual maturity amount for loans and long- term debt for which the fair value option has been elected under these standards: 2010 2009 Aggregate fair value carrying amount Contractual maturity amount Fair value over (under) contractual maturity amount Aggregate fair value carrying amount Contractual maturity amount Fair value over (under) contractual maturity amount Financial assets
Interest-bearing deposits with banks $ 6,193 $ 6,193 $ – $ 2,773 $ 2,773 $ –
Securities – Trading 6,258 n.a. n.a. 1,718 n.a. n.a.
Assets purchased under reverse repurchase agreements and securities
borrowed 51,713 51,747 (34) 18,911 18,914 (3)
Loans – Retail 179 176 3 214 214 –
Loans – Wholesale 2,899 3,000 (101) 2,818 2,934 (116)
Performing loans 2,899 3,000 (101) 2,441 2,557 (116)
90 days or more past due but not impaired – – – 377 377 –
Financial liabilities
Deposits
Personal $ 3,237 $ 3,300 $ (63) $ 2,605 $ 2,605 $ –
Business and government 62,654 62,597 57 40,335 40,167 168
Bank 9,479 9,479 – 10,880 10,880 –
Obligations related to assets sold under repurchase agreements and
securities loaned 26,242 26,243 (1) 21,628 21,626 2
Other liabilities 127 127 – 240 240 –
Subordinated debentures 119 127 (8) 110 120 (10)
The unrealized gains of these assets and liabilities recognized in income for the year ended October 31, 2010 was $52 million (October 31, 2009 – unrealized loss of $443 million). The amount of changes in fair value attributable to changes in credit risk for loans and receivables and attributable to our credit spreads for our financial liabilities, and the methodology to determine these amounts are disclosed in Note 2. Changes in fair value since November 1, 2009 attributable to changes in our credit spreads decreased the fair value of our term deposit liabilities by $32 million (October 31, 2009 – $550 million). This decrease is primarily due to the increase in our
credit spreads for both Canadian and U.S. denominated term deposit liabilities. Changes in fair value in the period attributable to changes in credit risk or our credit spreads on Loans – Wholesale, Other liabilities and Subordinated debentures were $(51) million, $nil and $(6) million, respectively (2009 – $27 million, $nil and $36 million). Interest income and expense of these debt securities and loans are measured based on their interest rates and are reported in Net interest income.
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles(continued)
Derivatives and hedging activities
Topic 815,Derivatives and Hedging(Topic 815) requires an entity to disclose how and why it uses derivatives, how it accounts for derivatives and any related hedged item, and how derivatives and hedged items affect the entity’s financial position, performance and cash flows. The guidance was effective for us on February 1, 2009, but did not change the accounting for derivatives and hedged items. Refer to Notes 1 and 7 for more information regarding our use of derivative instruments and hedging activities.
Fair value of derivatives by major types of products
The following table presents the fair values of the derivatives and non-derivative financial instruments categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
2010 2009
Designated as hedging instruments in hedging relationships
Designated as hedging instruments in hedging relationships Cash flow hedges Fair value hedges Net investment hedges Not designated in a hedging relationship(1) Cash flow hedges Fair value hedges Net investment hedges Not designated in a hedging relationship (1) Assets
Derivative financial instruments
Interest rate contracts $ 505 $2,059 $ – $ 65,030 $1,130 $2,107 $ – $ 50,732
Foreign exchange contracts – – 307 29,448 – – 139 25,598
Credit derivatives – – – 2,023 – – – 5,320
Other contracts – – – 3,757 – – – 7,359
Total $ 505 $2,059 $ 307 $ 100,258 $1,130 $2,107 $ 139 $ 89,009
Liabilities
Derivative financial instruments
Interest rate contracts $ 812 $ 60 $ – $ 61,226 $1,493 $ 82 $ – $ 46,551
Foreign exchange contracts – – 119 34,873 – – 327 23,832
Credit derivatives – – – 1,718 – – – 4,418
Other contracts – – – 5,346 – – – 7,844
Total $ 812 $ 60 $ 119 $ 103,163 $1,493 $ 82 $ 327 $ 82,645
Non–derivative financial instruments $ – $ – $ 8,732 n.a. $ – $ – $ 5,233 n.a.
(1) Derivative liabilities include stable value contracts on $170 million (October 31, 2009 – $257 million) of bank-owned life insurance policies and $2 million (October 31, 2009 – $3 million) of 401(k) plans.
n.a. not applicable
Hedging activities by major types of products
2010 2009 Net gains (losses) included in Non-interest income Net gains (losses) included in Net interest income After-tax unrealized gains (losses) included in OCI Net gains (losses) included in Non-interest income Net gains (losses) included in Net interest income After-tax unrealized gains (losses) included in OCI Fair value hedges
Ineffective portion
Interest rate contracts $ (4) $ n.a. $ n.a. $ 9 $ n.a. $ n.a.
Cash flow hedges
Ineffective portion
Interest rate contracts (20) n.a. n.a. 9 n.a. n.a.
Effective portion
Interest rate contracts n.a. n.a. (332) n.a. n.a. 185
Other contracts n.a. n.a. (2) n.a. n.a. –
Reclassified to income during the period(1)
Interest rate contracts n.a. (112) n.a. n.a. 53 n.a.
Other contracts n.a. (6) n.a. n.a. – n.a.
Net investment hedges
Foreign currency losses n.a. n.a. (1,798) n.a. n.a. (2,971)
Gains from hedges
Foreign exchange contracts n.a. n.a. 1,209 n.a. n.a. 1,982
Non-derivative financial instruments n.a. n.a. 270 n.a. n.a. 417
$ (24) $ (118) $ 1,146 $ 18 $ 53 $ (387)
(1) After-tax loss of $82 million (October 31, 2009 – $37 million) were reclassified from AOCI to income for the year ended October 31, 2010. n.a. not applicable
Revenue from trading and selected non-trading financial instruments
2010 2009
Non-interest income
Interest rate and credit $ 1,114 $ 1,954
Equities (140) 169
Foreign exchange and commodities(1) 407 641
Total $ 1,381 $ 2,764
(1) Includes precious metals.
Contingent features
Certain derivative instruments contain provisions that link our collateral posting requirements to our credit ratings from the major credit rating agencies. If our credit ratings were to fall, certain counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight
collateralization on net derivative liability positions. The aggregate net fair value of all derivative instruments with collateral posting requirements that are in a net liability position on October 31, 2010, 142 Royal Bank of Canada: Annual Report 2010 Consolidated Financial Statements
is $18.3 billion (October 31, 2009 – $10.5 billion) for which we have posted collateral of $14.9 billion (October 31, 2009 – $6.4 billion) in the normal course of business. If our credit ratings had been downgraded to BBB on October 31, 2010, we would have been required to post an additional $2.7 billion of collateral (October 31, 2009 – $2.2 billion) to the counterparties of these contracts. If our credit ratings were to fall below BBB, we do not expect that the additional collateral that we would be required to post would be material.
Credit derivatives and guarantees
ASC Topic 815, requires more disclosure about the potential adverse effects of changes in credit risk on the financial position, financial performance and cash flows of the sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The guidance also amends Topic 460,Guaranteesto require additional disclosure about the current status of the payment/performance risk of a guarantee. The following disclosure is provided pursuant to ASC Topic 815.
Events or circumstances that would require seller to perform under the credit derivative
Credit derivatives are over-the-counter contracts that transfer credit risk related to an underlying financial instrument (referenced asset) from one counterparty to another. Credit derivatives provide protection against the decline in value of the referenced asset as a result of specified credit events such as default or bankruptcy. Credit derivative instruments sold
Credit derivative instruments for which we are the seller of credit protection are summarized in the table below. These instruments have been classified as investment and non-investment grade based on the credit quality of the underlying referenced asset within the credit derivative. For most credit derivatives, the notional value represents the maximum amount payable by us. However, we do not exclusively monitor our exposure to credit derivatives based on notional value because this measure does not take into consideration the probability of occurrence. As such, the notional value is not a reliable indicator of our exposure to these contracts.
Credit derivatives – protection sold by ratings/maturity profile
2010 2009
Maximum Payout / Notional Fair value Maximum Payout / Notional Fair value
Within 1 year
1 to 5 years
Over
5 years Total Positive Negative
Within 1 year
1 to 5 years
Over
5 years Total Positive Negative
Credit default swaps(1)
Investment grade(2) $1,718 $ 5,759 $1,351 $ 8,828 $ 85 $ 79 $6,380 $19,864 $5,338 $31,582 $ 227 $1,105 Non-investment grade(2) 1,906 8,708 2,639 13,253 200 646 1,668 6,880 1,489 10,037 74 1,377
Non-rated 213 8,071 3,120 11,404 74 90 707 7,279 532 8,518 33 368
$3,837 $22,538 $7,110 $33,485 $ 359 $ 815 $8,755 $34,023 $7,359 $50,137 $ 334 $2,850
Credit default baskets
Not rated(3) $ 66 $ 4,320 $2,216 $ 6,602 $ – $ 493 $1,161 $ 4,538 $2,543 $ 8,242 $ – $1,074
Total(4) $3,903 $26,858 $9,326 $40,087 $ 359 $1,308 $9,916 $38,561 $9,902 $58,379 $ 334 $3,924 (1) Credit default swaps include total return swaps which are nominal to the entire portfolio.
(2) Credit ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent non-investment grade ratings. These credit ratings largely reflect those assigned by external rating agencies and represent the payment or performance risk of the underlying security or referenced asset. Where external ratings were not available, our internal ratings were used.
(3) Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a group of assets instead of a single asset; consequently, ratings have not been assigned because the underlying asset(s) cannot be reasonably rated.
(4) At October 31, 2010 the notional value and net carrying value of credit protection sold in which we held purchased protection with identical underlying assets was $30.5 billion and $0.7 billion, respectively (October 31, 2009 – $48.7 billion and $2.5 billion, respectively).
Guarantees
The following table summarizes significant guarantees we have provided to third parties by investment grade and non-investment grade.
2010 2009
Maximum potential amount of future payments