Critical Accounting Policies Allowance for Credit Losses  Financial Instruments Measured at Fair Value Accounting for Securitizations Income Taxes Pensions and Other Future Employee Benefits Other Than Temporary Impairment The Notes to Bank of Montreal’s October 31, 2002 consolidated financial statements outline BMO’s significant accounting poli- cies. The policies discussed below are considered particularly important, as they require management to make significant judgments, some of which may relate to matters that are inher- ently uncertain. The allowance for credit losses adjusts the value of loan assets to reflect existing credit losses. In assessing existing credit losses, we must rely on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These  matters include economic factors, developments affecting com- panies in particular industries and specific issues with respect to single borrowers. Changes in circumstances may cause future assessments of credit risk to be materially different than current assessments and may require an increase or decrease in the allowance for credit losses. Additional information on the pro- cess and methodology for determining the allowance for credit losses can be found in the discussion of credit risk on page 29  as well as in Note 4 on page 74 of the consolidated finan- cial statements. BMO records trading securities and customer trading derivatives at fair value. We adjust the carrying value of investment securities to fair value when we identify a decline in value that is other than temporary. Fair value represents our estimate of the amounts for which instruments could be exchanged in a current transaction between willing parties. The fair value of most financial instru- ments is determined using quoted market prices. In situations where listed prices or quotes are not available, fair values are determined using valuation models or prices of similar securities with appropriate adjustments for any differences. Valuation models include discounted cash flow and option pricing models. Management must apply judgment in the selection of the appro- priate approach to determining fair value and the assumptions that are inputs into the valuation models. These judgments may affect the fair value and resulting gain or loss reported. Additional information about BMO’s method of determining fair value is included in Note 3 on page 72 and Note 24 on page 90 of the consolidated financial statements. Securitization involves selling loans to off-balance sheet special- purpose entities or trusts (securitization entities), which then issue interest bearing investor certificates in order to fund the purchase of the loans. When these loans are securitized, they are removed from the balance sheet and we record a gain (loss) on sale. In determining the gain (loss), management must estimate future cash flows by relying on estimates of the amount of inter- est and fees to be collected from borrowers, the yield to be paid to investors, the rate at which the loans may be repaid before their scheduled maturity, expected credit losses, the fair value cost  of servicing, and the rate at which to discount these expected future cash flows. Actual cash flows may differ significantly from those estimated by management. As well, if management’s  estimate of future cash flows had been different, our gains on securitization would also have been different. Additional infor- mation about accounting for securitizations, including sensitivity analysis for key assumptions, can be found in Note 6 on page 76 of the consolidated financial statements. Our pensions and other future employee benefits expense is  calculated by our actuaries based on assumptions determined by management. These assumptions include the long-term rate of return on pension assets, the rate of future compensation increases, discount rates for pension and other future employee benefits obligations and the overall health care cost trend rate. If actual experience differs from the assumptions made by manage - ment, our pension and other future employee benefits expense could increase or decrease in future years as a result. Additional information regarding our accounting for pensions and other future employee benefits, including sensitivity analysis for key assumptions, is contained in Note 16 on page 81 of the consoli- dated financial statements. Investment securities that are carried at cost or amortized cost  or accounted for using the equity method are reviewed at each quarter-end reporting period to determine whether the fair value is below the current recorded value. When the fair value of  any of our investment securities has declined below its current recorded value, management is required to assess whether  the decline is other than temporary. In making this assessment, we consider such factors as the type of investment, the length  of time and extent to which the fair value has been less than  the current recorded value, the financial condition and near- term prospects of the issuer, and our intent and ability to hold the investment for a sufficient period of time to allow for any anticipated recovery. The decision to record a write-down, its amount and the period in which it is recorded would change  if management’s assessment of the above factors was different. Additional information regarding our accounting for investment securities is included in Note 3 on page 72 of the consolidated financial statements. The provision for income taxes is calculated based on the  expected tax treatment of transactions recorded in our consol- idated statements of income or shareholders’ equity. In deter- mining both the current and future components of our provision for income taxes, we interpret tax legislation in a variety of jurisdictions as well as make assumptions about the expected timing of the reversal of future tax assets and liabilities. If our interpretations differ from those of tax authorities or if the tim- ing of reversals is not as anticipated, our provision for income taxes could increase or decrease in future periods. BMO FINANCIAL GROUP ANNUAL REPORT 2002 25