1. Changes in accounting policies Current year changes Commencing
November 1, 2006, the Bank adopted three new CICA accounting
standards: (i) Financial Instruments - Recognition and Measurement,
(ii) Hedges and (iii) Comprehensive Income. The main requirements
of these new standards, related accounting policies subsequently
adopted by the Bank and the resulting financial statement impact
are further discussed below. As required, except to classify
unrealized foreign currency translation gains/losses on net
investments in self-sustaining foreign operations in accumulated
other comprehensive income (loss), prior periods have not been
restated as a result of implementing the new accounting standards.
As a result, the Bank has recorded a net reduction of $61 million
(net of income tax benefit of $31 million) to opening fiscal 2007
retained earnings for the cumulative prior period effect arising on
adoption of the new accounting standards. This transition impact
arose primarily from recognizing in retained earnings the deferred
gains and losses on transition date relating to certain previously
discontinued hedges. The impact of the changes to net income for
this quarter was a net increase of $8 million after tax. The most
significant balance sheet categories impacted on November 1, 2006
as a result of these new standards were as follows:
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$ millions Increase/ Balance sheet category (Decrease) Explanation
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Available-for-sale To record these securities at securities $ 1,091
fair value
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To record future taxes on the Future tax assets components of
accumulated other (Other assets) $ (369) comprehensive income
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After-tax impact to opening retained earnings resulting from
Retained earnings $ (61) adoption of new standards
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After-tax impact related to net unrealized gains on available-
Accumulated other for-sale securities and cash comprehensive income
$ 683 flow hedges
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(i) Financial Instruments - Recognition and Measurement The new
standards require all financial assets and financial liabilities to
be carried at fair value in the Consolidated Balance Sheet, except
the following which are carried at amortized cost unless designated
as held for trading upon initial recognition: loans and
receivables, securities designated as held-to-maturity and non-
trading financial liabilities. The methods used by the Bank in
determining the fair value of financial instruments are unchanged
as a result of implementing these new accounting standards. The
standards require unrealized gains and losses on financial assets
that are held as available-for-sale to be recorded in other
comprehensive income until realized, at which time they will be
recorded in the Consolidated Statement of Income. The Bank has
classified all investment securities at November 1, 2006 as
available-for-sale. As such, the related unrealized gains and
losses on these securities are recorded in accordance with these
requirements. Available-for-sale equity securities which do not
have a quoted market price will continue to be recorded at cost.
Available-for-sale securities are still subject to a regular review
for losses that are other than temporary. If a security is assessed
to have a loss that is other than temporary, the security is
written down to fair value. The change in accounting policy related
to other than temporary impairment was not material. The Bank
accounts for the purchase and sale of securities using settlement
date accounting for purposes of both the Consolidated Balance Sheet
and the Consolidated Statement of Income. Realized and unrealized
gains and losses on financial assets and liabilities that are held
for trading will continue to be recorded in the Consolidated
Statement of Income. All derivatives, including embedded
derivatives that must be separately accounted for, are now recorded
at fair value in the Consolidated Balance Sheet. This primarily
impacts asset/liability management derivatives which meet hedge
accounting criteria as these were previously accounted for on an
accrual basis. These hedging derivatives are now recorded in other
assets and other liabilities. In addition, under the new accounting
standards, inception gains or losses will no longer be recognized
on derivative instruments where the valuation is dependant on
unobservable market data. In such instances, the inception gain or
loss will be deferred over the life of the related contract or
until the valuation inputs become observable. Pursuant to the new
requirements, a liability will be recorded for the fair value of
the obligation assumed at the inception of certain guarantees. The
guarantees affected include standby letters of credit, letters of
guarantee, credit enhancements and other similar contracts. The
fair value of the obligation at inception is normally based on the
discounted cash flow of the premium to be received for the
guarantee, resulting in a corresponding asset. The Bank has
recorded an increase in other liabilities of $78 million as at
November 1, 2006 and a corresponding increase in other assets
relating to these guarantees. The Bank's accounting policy is to
capitalize transaction costs relating to non-trading financial
assets and non-trading financial liabilities and, where applicable,
these amounts are recognized in net interest income over the
expected life of the instrument. Items designated as trading Under
the new accounting standards, the Bank has elected to designate
certain portfolios of assets and liabilities as trading, as further
described below. The Bank's trading operations transact credit
derivatives for customers. The Bank may purchase the underlying
loan(s) from another counterparty to economically hedge the
derivative exposure. By classifying these loans as trading, the
fair value changes will be recorded in income along with the fair
value changes of the derivative. As a result, the Bank
significantly reduces or eliminates an accounting mismatch between
the two instruments. The fair value of these traded loans is based
on quoted market prices. The fair value of these loans was $4.6
billion as at January 31, 2007 and $3.3 billion as at November 1,
2006. The change in fair value that was recorded through trading
income during the quarter was a gain of $110 million, and was
entirely offset by changes in the fair value of the related credit
derivatives. The Bank's trading operations purchase loan assets in
specifically authorized portfolios for which performance is
evaluated on a fair value basis. The fair value of these traded
loans is based on quoted market prices. The fair value of these
loans was $152 million as at January 31, 2007 and $164 million as
at November 1, 2006. The change in fair value that was recorded
through trading income during the quarter was a gain of $5 million.
The Bank has classified certain deposit note liabilities containing
extension features as trading in order to significantly reduce an
accounting mismatch between these liabilities and fair value
changes in related derivatives. The fair value of these deposit
note liabilities, including the extension feature, is determined by
discounting expected cash flows, using current market rates offered
for similar instruments. The fair value of these liabilities was
$847 million as at January 31, 2007 and $785 million as at November
1, 2006. The change in fair value that was recorded through net
interest income on these deposit note liabilities during the
quarter was a gain of $2 million, virtually all of which was due to
changes in market interest rates. There was no change in fair value
attributable to the credit risk. (ii) Hedges The criteria
specifying when a derivative instrument may be accounted for as a
hedge has not changed substantially. There are three main types of
hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net
investment hedges. Previously, derivatives that met hedge
accounting criteria were accounted for on an accrual basis. In a
fair value hedge, the change in fair value of the hedging
derivative is offset in the Consolidated Statement of Income by the
change in fair value of the hedged item relating to the hedged
risk. The Bank utilizes fair value hedges primarily to convert
fixed rate financial assets and liabilities to floating rate. The
main financial instruments designated in fair value hedging
relationships include bond assets, loans, deposit liabilities and
subordinated debentures. In a cash flow hedge, the change in fair
value of the hedging derivative is recorded in other comprehensive
income, to the extent it is effective, until the hedged item
affects the Consolidated Statement of Income. The Bank utilizes
cash flow hedges primarily to convert floating rate deposit
liabilities to fixed rate. Accumulated other comprehensive income
arising from cash flow hedges was a loss of $1 million (after-tax)
as at January 31, 2007. The reclassification from accumulated other
comprehensive income to earnings over the next twelve months as a
result of outstanding cash flow hedges is not expected to be
material. As at January 31, 2007, the maximum length of cash flow
hedges outstanding was less than seven years. In a net investment
hedge, the change in fair value of the hedging instrument, to the
extent it is effective, is recorded directly in other comprehensive
income. These amounts are recognized in income when the
corresponding cumulative translation adjustments from the
self-sustaining foreign operation are recognized in income. Any
hedge ineffectiveness is measured and recorded in current period
net interest income in the Consolidated Statement of Income.
Previously, hedge ineffectiveness was generally recognized in the
Consolidated Statement of Income over the life of the hedging
relationship. The Bank recorded a gain of $12 million, of which $9
million related to cash flow hedges, during the first quarter
relating to the ineffective portion of designated hedges. When
either a fair value or cash flow hedge is discontinued, any
cumulative adjustment to either the hedged item or other
comprehensive income is recognized in income over the remaining
term of the original hedge or when the hedged item is derecognized.
There were no significant changes to the Bank's risk management
policies and hedging activities as a result of the new accounting
standards. (iii) Comprehensive Income A new Statement of
Comprehensive Income now forms part of the Bank's consolidated
financial statements and displays current period net income and
other comprehensive income. Accumulated other comprehensive income
(loss) is a separate component of shareholders' equity. The
Consolidated Statement of Comprehensive Income reflects changes in
accumulated other comprehensive income, comprised of changes in
unrealized gains and losses on available-for- sale assets as well
as changes in the fair value of derivatives designated as cash flow
hedges, to the extent they are effective. Unrealized foreign
currency translation amounts arising from self-sustaining foreign
operations and the impact of any related hedges, previously
reported separately in the Consolidated Statement of Changes in
Shareholders' Equity, now form part of accumulated other
comprehensive income (loss). The components of accumulated other
comprehensive income (loss) as at January 31, 2007 and other
comprehensive income (loss) for the three months then ended were as
follows. Accumulated other comprehensive income (loss) As at and
for the three months ended
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Opening Transition Net Ending balance amount change balance
----------------------------------------------- October 31 November
1 January 31 ($ millions) 2006 2006 2007
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Unrealized foreign currency translation gains (losses), net of
hedging activities $(2,321) $ - $ 522 $(1,799)(1) Unrealized gains
on available-for-sale securities, net of hedging activities - 706
48 754(2) Gains (losses) on derivative instruments designated as
cash flow hedges - (23) 22 (1)(3)
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Accumulated other comprehensive income (loss) $(2,321) $ 683 $ 592
$(1,046)
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--------------------------------------------------------- Opening
Net Ending balance change balance
----------------------------------- October 31 January 31 ($
millions) 2005 2006
---------------------------------------------------------
Unrealized foreign currency translation gains (losses), net of
hedging activities $(1,961) $ (240) $(2,201)(1) Unrealized gains on
available-for-sale securities, net of hedging activities - - -
Gains (losses) on derivative instruments designated as cash flow
hedges - - -
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Accumulated other comprehensive income (loss) $(1,961) $ (240)
$(2,201) ---------------------------------------------------------
--------------------------------------------------------- (1) Net
of income tax expense of nil. (2) Net of income tax expense of
$414. Also, the balance as at January 31, 2007 includes unrealized
losses of $150 after-tax on the available-for-sale securities. (3)
Net of income tax benefit of $1. Other comprehensive income (loss)
The components of other comprehensive income (loss) were as
follows: For the three months ended
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January 31 January 31 ($ millions) 2007 2006
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Net change in unrealized foreign currency translation gains
(losses) Unrealized foreign currency translation gains (losses)(1)
$ 892 $ (444) Gains (losses) on hedges of net investments in
self-sustaining foreign operations(1) (370) 204
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522 (240)
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Net change in unrealized gains (losses) on available-for-sale
securities Unrealized gains on available-for-sale securities(2) 124
- Reclassification of net realized losses on hedged
available-for-sale securities to net income(3) 9 - Reclassification
of net realized gains to net income(4) (85) -
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48 -
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Net change in gains (losses) on derivative instruments designated
as cash flow hedges Gains on derivative instruments designated as
cash flow hedges(5) 247 - Reclassification of gains to net
income(6) (225) -
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22 -
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Other comprehensive income (loss) $ 592 $ (240)
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(1) Net of income tax expense of nil (January 31, 2006 - nil). (2)
Net of income tax expense of $73. (3) Net of income tax expense of
$1. (4) Net of income tax benefit of $42. (5) Net of income tax
expense of $125. (6) Net of income tax benefit of $113. Prior year
change In the third quarter of 2006, the Bank early adopted a CICA
Abstract dealing with the accounting for stock-based compensation
for employees eligible to retire before the vesting date. This
Abstract required that: i) compensation costs attributable to
stock-based compensation awards granted to employees who are
eligible to retire on the grant date be fully recognized on the
grant date; and ii) compensation costs attributable to stock-based
compensation awards granted to employees who will become eligible
to retire during the vesting period be recognized over the time
frame between the grant date and the date of retirement
eligibility. Previously, these costs were recognized by the Bank
over the vesting period of the award. The Bank did not restate net
income for any particular prior quarter, as it was not material to
any particular quarter or annual period, and recorded an adjustment
of $25 million (net of income tax benefit of $13 million) to
opening fiscal 2006 retained earnings for the cumulative effect on
prior years arising from this change in accounting policy. 2. Sales
of loans through securitizations The Bank securitizes residential
mortgages through the creation of mortgage-backed securities. No
credit losses are expected, as the mortgages are insured. For the
quarter ended January 31, 2007, the key weighted-average
assumptions used to measure the fair value at the dates of
securitization were a prepayment rate of 16%, an excess spread of
1.2% and a discount rate of 4.1%. The following table summarizes
the Bank's sales. For the three months ended
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January 31 October 31 January 31 ($ millions) 2007 2006 2006
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Net cash proceeds(1) $ 848 $ 699 $ 434 Retained interest 32 18 11
Retained servicing liability (7) (5) (2)
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873 712 443 Residential mortgages securitized 861 703 437
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Net gain on sale $ 12 $ 9 $ 6
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(1) Excludes insured mortgages which were securitized and retained
by the Bank of $526 for the three months ended January 31, 2007
(October 31, 2006 - $160; January 31, 2006 - $268). As at January
31, 2007, the outstanding balance of mortgage-backed securities was
$2,502, and these assets have been classified as available-for-sale
securities. 3. Allowance for credit losses. The following table
summarizes the change in the allowance for credit losses. For the
three months ended
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January 31 October 31 January 31 ($ millions) 2007 2006 2006
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Balance at beginning of period $ 2,618 $ 2,706 $ 2,475 Write-offs
(168) (150) (131) Recoveries 34 36 39 Provision for credit losses
63 32 75 Other, including foreign exchange adjustment 84 (6) (13)
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Balance at the end of period(1)(2)(3) $ 2,631 $ 2,618 $ 2,445
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(1) As at January 31, 2007, includes $26 of specific and general
allowances relating to acquisitions of new subsidiaries (October
31, 2006 - $18; January 31, 2006 - $7), which may change as the
valuation of the acquired loan assets is finalized. (2) As at
January 31, 2007, $11 has been recorded in other liabilities
(October 31, 2006 - $11; January 31, 2006 - $11). (3) As at January
31, 2007, the general allowance for credit losses was $1,323
(October 31, 2006 - $1,307; January 31, 2006 - $1,330). 4.
Significant capital transactions In the first quarter of 2007, the
Bank initiated a new normal course issuer bid to purchase up to 20
million of the Bank's common shares. This represents approximately
2 per cent of the Bank's common shares outstanding as at December
31, 2006. The bid will terminate on the earlier of January 11, 2008
or the date on which the Bank completes its purchases. As at
January 31, 2007, the Bank had not purchased any common shares
pursuant to this bid. Series 14 Non-cumulative preferred shares
were issued on January 24, 2007 and are entitled to non-cumulative
preferential cash dividends payable quarterly in an amount per
share of $0.28125. The initial dividend, payable on April 26, 2007,
will be $0.28356 per share. With regulatory approval, the shares
may be redeemed by the Bank on or after April 26, 2012 at $26.00
per share, together with declared and unpaid dividends to the date
then fixed for redemption, and thereafter at annually declining
premiums until April 27, 2016, following which no redemption
premium is payable. These preferred shares qualify as Tier 1
capital. 5. Employee future benefits Employee future benefits
include pensions and other post-retirement benefits,
post-employment benefits and compensated absences. The following
table summarizes the expenses for the Bank's principal plans(1).
For the three months ended
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January 31 October 31 January 31 ($ millions) 2007 2006 2006
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Benefit expenses Pension plans $ 9 $ 20 $ 24 Other benefit plans 30
32 31
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$ 39 $ 52 $ 55
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(1) Other plans operated by certain subsidiaries of the Bank are
not considered material and are not included in this note. 6.
Segmented results of operations Scotiabank is a diversified
financial services institution that provides a wide range of
financial products and services to retail, commercial and corporate
customers around the world. The Bank is organized into three main
operating segments: Domestic Banking, International Banking and
Scotia Capital. Results for these operating segments are presented
in the Business segment income tables above. 7. Acquisitions During
the fourth quarter of 2006, the Bank completed the acquisition of
Corporacion Interfin, the parent company of Banco Interfin in Costa
Rica, for $325 million. Total assets at acquisition were
approximately $1.6 billion, with the majority of the assets being
loans. The estimated total goodwill of $247 million and other
intangible assets of $35 million have been recorded in the
Consolidated Balance Sheet. These amounts may be refined as the
Bank completes its valuation of the assets acquired and liabilities
assumed. The Bank completed the acquisition of Dehring Bunting
& Golding Ltd. (DB&G) on December 13, 2006 through a
purchase of 68% of its outstanding shares for $76 million. Total
assets at acquisition were $663 million, comprised primarily of
securities. The Bank has not completed its assessment and valuation
of the assets acquired and liabilities assumed for DB&G. As a
result, the amount of the purchase price in excess of the carrying
value of the assets and liabilities has not been fully allocated to
the acquired assets and liabilities assumed in the Consolidated
Balance Sheet. The resultant goodwill and other intangible assets
are not expected to be material to the Bank's consolidated
financial statements. Shareholder and Investor Information Direct
deposit service Shareholders may have dividends deposited directly
into accounts held at financial institutions which are members of
the Canadian Payments Association. To arrange direct deposit
service, please write to the Transfer Agent. Dividend and Share
Purchase Plan Scotiabank's dividend reinvestment and share purchase
plan allows common and preferred shareholders to purchase
additional common shares by reinvesting their cash dividend without
incurring brokerage or administrative fees. As well, eligible
shareholders may invest up to $20,000 each fiscal year to purchase
additional common shares of the Bank. Debenture holders may apply
interest on fully registered Bank subordinated debentures to
purchase additional common shares. All administrative costs of the
plan are paid by the Bank. For more information on participation in
the plan, please contact the Transfer Agent. Dividend dates for
2007 Record and payment dates for common and preferred shares,
subject to approval by the Board of Directors. Record Date Payment
Date January 2 January 29 April 3 April 26 July 3 July 27 October 2
October 29 Duplicated communication If your shareholdings are
registered under more than one name or address, multiple mailings
will result. To eliminate this duplication, please write to the
Transfer Agent to combine the accounts. Website For information
relating to Scotiabank and its services, visit us at our website:
http://www.scotiabank.com/. Conference call and Web broadcast The
quarterly results conference call will take place on March 6, 2007,
at 1:00 p.m. EST and is expected to last approximately one hour.
Interested parties are invited to access the call live, in
listen-only mode, by telephone, toll-free, at 1-800-732-6179
(please call five to 15 minutes in advance). In addition, an audio
webcast, with accompanying slide presentation, may be accessed via
the Investor Relations page of http://www.scotiabank.com/.
Following discussion of the results by Scotiabank executives, there
will be a question and answer session. Listeners are invited to
submit questions by e- mail to . A telephone replay of the
conference call will be available from March 6, 2007, to March 20,
2007, by calling (416) 640-1917 and entering the identification
code 21218684 followed by the number sign. The archived audio
webcast will be available on the Bank's website for three months.
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CONTACT INFORMATION Investors: Financial analysts, portfolio
managers and other investors requiring financial information,
please contact Investor Relations, Finance Department: Scotiabank
Scotia Plaza, 44 King Street West Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-5982 Fax: (416) 866-7867 E-mail: Media: For
other information and for media enquiries, please contact the
Public, Corporate and Government Affairs Department at the above
address. Telephone: (416) 866-3925 Fax: (416) 866-4988 E-mail:
Shareholders: For enquiries related to changes in share
registration or address, dividend information, lost share
certificates, estate transfers, or to advise of duplicate mailings,
please contact the Bank's Transfer Agent: Computershare Trust
Company of Canada 100 University Avenue, 9th Floor Toronto,
Ontario, Canada M5J 2Y1 Telephone: 1-877-982-8767 Fax:
1-888-453-0330 E-mail: Co-Transfer Agent (U.S.A.) Computershare
Trust Company N.A. 350 Indiana Street Golden, Colorado 80401 U.S.A.
Telephone: 1-800-962-4284 For other shareholder enquiries, please
contact the Finance Department: Scotiabank Scotia Plaza, 44 King
Street West Toronto, Ontario, Canada M5H 1H1 Telephone: (416)
866-4790 Fax: (416) 866-4048 E-mail: Rapport trimestriel disponible
en francais Le Rapport annuel et les etats financiers de la Banque
sont publies en francais et en anglais et distribues aux
actionnaires dans la version de leur choix. Si vous preferez que la
documentation vous concernant vous soit adressee en francais,
veuillez en informer Relations publiques, Affaires de la societe et
Affaires gouvernementales, La Banque de Nouvelle-Ecosse, Scotia
Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en
joignant, si possible, l'etiquette d'adresse, afin que nous
puissions prendre note du changement. The Bank of Nova Scotia is
incorporated in Canada with limited liability. DATASOURCE:
Scotiabank - Financial Releases CONTACT: PRNewswire - - 03/06/2007
Copyright