Consolidated Financial Statements

 

Table of Contents

 

 

2021 Scotiabank Annual Report  |  145

Consolidated Financial Statements

 

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION

The management of The Bank of Nova Scotia (the Bank) is responsible for the integrity and fair presentation of the financial information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The consolidated financial statements also comply with the accounting requirements of the Bank Act.

The consolidated financial statements, where necessary, include amounts which are based on the best estimates and judgment of management. Financial information presented elsewhere in this Annual Report is consistent with that shown in the consolidated financial statements.

Management has always recognized the importance of the Bank maintaining and reinforcing the highest possible standards of conduct in all of its actions, including the preparation and dissemination of statements fairly presenting the financial condition of the Bank. In this regard, management has developed and maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition, and liabilities are recognized. The system is augmented by written policies and procedures, the careful selection and training of qualified staff, the establishment of organizational structures providing an appropriate and well-defined division of responsibilities, and the communication of policies and guidelines of Scotiabank’s Code of Conduct throughout the Bank.

Management, under the supervision of and the participation of the President and Chief Executive Officer and the Group Head and Chief Financial Officer, have a process in place to evaluate disclosure controls and procedures and internal control over financial reporting in line with Canadian and U.S. securities regulations.

The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic audits of all aspects of the Bank’s operations. As well, the Bank’s Chief Auditor has full and free access to, and meets periodically with the Audit and Conduct Review Committee of the Board of Directors. In addition, the Bank’s compliance function maintains policies, procedures and programs directed at ensuring compliance with regulatory requirements, including conflict of interest rules.

The Office of the Superintendent of Financial Institutions Canada, which is mandated to protect the rights and interests of the depositors and creditors of the Bank, examines and enquires into the business and affairs of the Bank, as deemed necessary, to determine whether the provisions of the Bank Act are being complied with, and that the Bank is in a sound financial condition.

The Audit and Conduct Review Committee, composed entirely of outside directors, reviews the consolidated financial statements with both management and the independent auditors before such statements are approved by the Board of Directors and submitted to the shareholders of the Bank.

The Audit and Conduct Review Committee reviews and reports its findings to the Board of Directors on all related party transactions that may have a material impact on the Bank.

KPMG LLP, the independent auditors appointed by the shareholders of the Bank, have audited the consolidated financial position of the Bank as at October 31, 2021 and October 31, 2020 and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2021 prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board in accordance with Canadian Generally Accepted Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) and the effectiveness of internal control over financial reporting and have expressed their opinions upon completion of such audits in the reports to the shareholders. The Shareholders’ Auditors have full and free access to, and meet periodically with, the Audit and Conduct Review Committee to discuss their audits, including any findings as to the integrity of the Bank’s accounting, financial reporting and related matters.

 

 

 

Toronto, Canada

November 30, 2021

 

146  |  2021 Scotiabank Annual Report

(This page intentionally left blank)

 

 

 

2021 Scotiabank Annual Report  |  147

(This page intentionally left blank)

 

 

 

148  |  2021 Scotiabank Annual Report

(This page intentionally left blank)

 

 

 

2021 Scotiabank Annual Report  |  149

Consolidated Financial Statements

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of The Bank of Nova Scotia

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of The Bank of Nova Scotia (the Bank) as at October 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended October 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2021 and 2020, and its financial performance and its cash flows for each of the years in the three-year period ended October 31, 2021, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Bank’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 30, 2021 expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit and Conduct Review Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

(i) Assessment of Allowance for Credit Losses on Financial Assets (ACL)

Refer to Notes 3 and 13 to the consolidated financial statements.

The Bank’s ACL was $5,626 million as at October 31, 2021. The Bank applies a three-stage approach to measure the ACL, using an expected credit loss (ECL) approach as required under IFRS 9 Financial Instruments. The Bank’s ACL calculations are outputs of complex models. The ACL calculation reflects a probability-weighted outcome that considers multiple scenarios based on the Bank’s view of forecasts of future events and economic conditions. The probability of default (PD), loss given default (LGD) and exposure at default (EAD) inputs used to estimate ACL are modeled based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio. The Bank assesses when there has been a significant increase in credit risk subsequent to origination or where the financial asset is in default. If there has been a significant increase in credit risk or the financial asset is in default, lifetime ACL is recorded; otherwise, ACL equal to 12 month expected credit losses is recorded. The estimation of ECL for each stage and the assessment of significant increases in credit risk consider information about past events and current conditions as well as forecasts of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment. Qualitative adjustments or overlays may also be recorded by the Bank using expert credit judgment where the inputs and models do not capture all relevant risk factors.

We identified the assessment of the ACL as a critical audit matter. Significant auditor judgment was required because of the use of complex models and the high degree of measurement uncertainty due to the significant judgments inherent in the Bank’s methodology such as judgments about forward-looking information, including the impact of the COVID-19 pandemic. These judgments impact certain inputs, assumptions, qualitative adjustments or overlays, and the determination of when there has been a significant increase in credit risk. The assessment of the ACL also required significant auditor attention and complex auditor judgment to apply and evaluate the results of audit procedures. This required specialized skills, industry knowledge, and relevant experience.

The following are the primary procedures we performed to address this critical audit matter. With the involvement of our credit risk and economics professionals with specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s ACL process. This included internal controls related to: (1) periodic validation and performance monitoring of models used to derive key modeled inputs into the ACL calculation being PD, LGD and EAD; (2) benchmarking of certain macroeconomic variables, model validation associated with the derivation of the remaining variables and review of the alternative scenarios and probability weights used in the ACL models; (3) the methodology to determine whether there has been a significant increase in credit risk; and (4) the methodology and assumptions used in the determination of qualitative adjustments or overlays. Additionally, for non-retail loans, we tested certain internal controls related to loan reviews over the determination of loan risk grades. We involved credit risk and economics professionals with specialized skills, industry knowledge and relevant experience who assisted in: (1) evaluating the methodology and models used to derive key modeled inputs into the ACL calculation being PD, LGD and EAD and the determination of whether there has been a significant increase in credit risk; (2) assessing the appropriateness of certain underlying macroeconomic variables against external economic data, evaluating the model used to derive other macroeconomic variables and evaluating the assumptions associated with the alternative economic scenarios and the related probabilities; and (3) assessing the qualitative adjustments or overlays by applying our knowledge of the industry and credit judgment

 

150  |  2021 Scotiabank Annual Report

Consolidated Financial Statements

 

to evaluate the appropriateness of the Bank’s underlying methodology and assumptions. Additionally, for a selection of non-retail loans, we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating scale.

(ii) Assessment of the Measurement of Fair Value of Certain Financial Instruments

Refer to Notes 3 and 7 to the consolidated financial statements.

The Bank measures $246,411 million of financial assets and $105,825 million of financial liabilities as at October 31, 2021 at fair value on a recurring basis. Where financial instruments trade in inactive markets or when using internal models where observable parameters do not exist, significant management judgment is required for valuation purposes. The valuation techniques used in determining the fair value of financial instruments include internal models and net asset valuations. The significant unobservable inputs used in the Bank’s valuation techniques include General Partner valuations per financial statements (NAVs), interest rate and equity volatility (volatility) and correlation.

We identified the assessment of the measurement of fair value for certain financial instruments as a critical audit matter. Significant auditor judgment was required due to the high degree of estimation uncertainty associated with the fair value of certain financial assets and financial liabilities. Significant and subjective auditor judgment was required to evaluate the results of audit procedures related to the valuation techniques, including significant unobservable inputs and the methodology used to develop the internal models.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s processes to determine the fair value of certain financial instruments with the involvement of valuation and information technology professionals with specialized skills, industry knowledge and relevant experience. This included internal controls related to: (1) model validation at inception and periodically; (2) review of NAVs; (3) independent price verification, including assessment of rate sources; and (4) segregation of duties and access controls. With the involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, we tested the fair value of a sample of certain financial instruments. Depending on the nature of the financial instruments, we did this by comparing the NAV to external information or by developing an independent estimate of fair value and comparing it to the fair value determined by the Bank.

(iii) Assessment of Uncertain Tax Provisions

Refer to Notes 3 and 27 to the consolidated financial statements.

The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate.

We identified the assessment of uncertain tax provisions as a critical audit matter because there is a high degree of subjectivity and complex auditor judgment required in assessing the Bank’s interpretation of tax law and its best estimate of the ultimate resolution of tax positions. This required specialized skills, industry knowledge and relevant experience, to apply audit procedures and evaluate the results of those audit procedures.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s income tax uncertainties process with the involvement of taxation professionals with specialized skills, industry knowledge and relevant experience. This included internal controls related to the (1) identification of tax uncertainties, including the interpretation of tax law and (2) determination of the best estimate of the provision required to settle these tax uncertainties. We involved tax professionals with specialized skills and knowledge, who assisted in (1) evaluating the Bank’s interpretations of tax laws by developing an independent assessment based on our understanding and interpretation of tax laws and considering its impact on the measurement, if applicable, of the uncertain tax provisions; (2) reading and evaluating advice obtained by the Bank from external specialists, and considering its impact on the measurement, if applicable, of the uncertain tax provisions; and (3) inspecting correspondence and settlement documents with applicable taxation authorities, including assessment of the impact of the expiration of statutes of limitations.

 

Chartered Professional Accountants, Licensed Public Accountants

We have served as the Bank’s auditor since 2006 and as joint auditor for 14 years prior to that.

Toronto, Canada

November 30, 2021

 

2021 Scotiabank Annual Report  |  151

Consolidated Financial Statements

 

Consolidated Statement of Financial Position
As at October 31 ($ millions)		Note				2021				2020
Assets
Cash and deposits with financial institutions			6			$	86,323			$	76,460
Precious metals							755				1,181
Trading assets
Securities			8	(a)			137,148				108,331
Loans			8	(b)			8,113				8,352
Other							1,051				1,156
							146,312				117,839
Securities purchased under resale agreements and securities borrowed							127,739				119,747
Derivative financial instruments			10				42,302				45,065
Investment securities			12				75,199				111,389
Loans
Residential mortgages			13				319,678				284,684
Personal loans			13				91,540				93,758
Credit cards			13				12,450				14,797
Business and government			13				218,944				217,663
							642,612				610,902
Allowance for credit losses			13	(e)			5,626				7,639
							636,986				603,263
Other
Customers’ liability under acceptances, net of allowance							20,404				14,228
Property and equipment			16				5,621				5,897
Investments in associates			17				2,604				2,475
Goodwill and other intangible assets			18				16,604				17,015
Deferred tax assets			27	(c)			2,051				2,185
Other assets			19				21,944				19,722
							69,228				61,522
						$	1,184,844			$	1,136,466
Liabilities
Deposits
Personal			20			$	243,551			$	246,135
Business and government			20				511,348				464,619
Financial institutions			20				42,360				40,084
							797,259				750,838
Financial instruments designated at fair value through profit or loss			9				22,493				18,899
Other
Acceptances							20,441				14,305
Obligations related to securities sold short							40,954				31,902
Derivative financial instruments			10				42,203				42,247
Obligations related to securities sold under repurchase agreements and securities lent							123,469				137,763
Subordinated debentures			21				6,334				7,405
Other liabilities			22				58,799				62,604
							292,200				296,226
							1,111,952				1,065,963
Equity
Common equity
Common shares			24	(a)			18,507				18,239
Retained earnings							51,354				46,345
Accumulated other comprehensive income (loss)							(5,333	)			(2,125	)
Other reserves							222				360
Total common equity							64,750				62,819
Preferred shares and other equity instruments			24	(b)			6,052				5,308
Total equity attributable to equity holders of the Bank							70,802				68,127
Non-controlling interests in subsidiaries			31	(b)			2,090				2,376
							72,892				70,503
						$	1,184,844			$	1,136,466

 

Aaron W. Regent		Brian J. Porter
Chairman of the Board		President and Chief Executive Officer

The accompanying notes are an integral part of these consolidated financial statements.

 

152  |  2021 Scotiabank Annual Report

Consolidated Financial Statements

 

Consolidated Statement of Income

 

For the year ended October 31 ($ millions)		Note				2021				2020				2019
Revenue
Interest income(1)			32
Loans						$	23,159			$	26,977			$	29,116
Securities							1,467				2,035				2,238
Securities purchased under resale agreements and securities borrowed							178				286				502
Deposits with financial institutions							182				414				928
							24,986				29,712				32,784
Interest expense			32
Deposits							6,465				10,731				13,871
Subordinated debentures							180				240				294
Other(2)							1,380				1,421				1,442
							8,025				12,392				15,607
Net interest income							16,961				17,320				17,177
Non-interest income
Card revenues							749				789				977
Banking services fees							1,598				1,540				1,812
Credit fees							1,485				1,348				1,316
Mutual funds							2,394				1,945				1,849
Brokerage fees							1,039				902				876
Investment management and trust							994				946				1,050
Underwriting and other advisory							724				690				497
Non-trading foreign exchange							787				708				667
Trading revenues			33				2,033				2,411				1,488
Net gain on sale of investment securities			12	(e)			419				607				351
Net income from investments in associated corporations			17				339				242				650
Insurance underwriting income, net of claims							398				497				676
Other fees and commissions							677				688				949
Other							655				703				699
							14,291				14,016				13,857
Total revenue							31,252				31,336				31,034
Provision for credit losses			13	(e)			1,808				6,084				3,027
							29,444				25,252				28,007
Non-interest expenses
Salaries and employee benefits							8,541				8,624				8,443
Premises and technology(2)							2,351				2,408				2,807
Depreciation and amortization(2)							1,511				1,546				1,053
Communications							369				418				459
Advertising and business development							404				445				625
Professional							789				753				861
Business and capital taxes							511				517				515
Other							2,142				2,145				1,974
							16,618				16,856				16,737
Income before taxes							12,826				8,396				11,270
Income tax expense			27				2,871				1,543				2,472
Net income						$	9,955			$	6,853			$	8,798
Net income attributable to non-controlling interests in subsidiaries			31	(b)			331				75				408
Net income attributable to equity holders of the Bank						$	9,624			$	6,778			$	8,390
Preferred shareholders and other equity instrument holders							233				196				182
Common shareholders						$	9,391			$	6,582			$	8,208
Earnings per common share (in dollars)
Basic			34			$	7.74			$	5.43			$	6.72
Diluted			34				7.70				5.30				6.68
Dividends paid per common share (in dollars)			24	(a)			3.60				3.60				3.49

 

(1)	Includes interest income on financial assets measured at amortized cost and FVOCI, calculated using the effective interest method, of $24,547 for the year ended October 31, 2021 (October 31, 2020 – $29,173; October 31, 2019 – $32,436).

(2)	The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated.

The accompanying notes are an integral part of these consolidated financial statements.

 

2021 Scotiabank Annual Report  |  153

Consolidated Financial Statements

 

Consolidated Statement of Comprehensive Income

 

For the year ended October 31 ($ millions)		2021				2020				2019
Net income		$	9,955			$	6,853			$	8,798
Other comprehensive income (loss)
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses):
Net unrealized foreign currency translation gains (losses)			(4,515	)			(2,433	)			(626	)
Net gains (losses) on hedges of net investments in foreign operations			1,307				347				(232	)
Income tax expense (benefit):
Net unrealized foreign currency translation gains (losses)			(31	)			62				21
Net gains (losses) on hedges of net investments in foreign operations			343				91				(60	)
			(3,520	)			(2,239	)			(819	)
Net change in fair value due to change in debt instruments measured at fair value through other comprehensive income:
Net gains (losses) in fair value			(1,341	)			1,495				1,265
Reclassification of net (gains) losses to net income			522				(1,091	)			(1,150	)
Income tax expense (benefit):
Net gains (losses) in fair value			(346	)			387				308
Reclassification of net (gains) losses to net income			127				(276	)			(298	)
			(600	)			293				105
Net change in gains (losses) on derivative instruments designated as cash flow hedges:
Net gains (losses) on derivative instruments designated as cash flow hedges			(1,267	)			2,543				361
Reclassification of net (gains) losses to net income			176				(2,604	)			596
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges			(471	)			689				86
Reclassification of net (gains) losses to net income			186				(718	)			163
			(806	)			(32	)			708
Other comprehensive income (loss) from investments in associates			37				(2	)			103
Items that will not be reclassified subsequently to net income
Net change in remeasurement of employee benefit plan asset and liability:
Actuarial gains (losses) on employee benefit plans			1,815				(620	)			(1,096	)
Income tax expense (benefit)			480				(155	)			(281	)
			1,335				(465	)			(815	)
Net change in fair value due to change in equity instruments designated at fair value through other comprehensive income:
Net gains (losses) in fair value			532				(122	)			121
Income tax expense (benefit)			124				(37	)			26
			408				(85	)			95
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair value option:
Change in fair value due to change in own credit risk on financial liabilities designated under the fair value option			(270	)			(404	)			11
Income tax expense (benefit)			(71	)			(106	)			3
			(199	)			(298	)			8
Other comprehensive income (loss) from investments in associates			5				(8	)			(10	)
Other comprehensive income (loss)			(3,340	)			(2,836	)			(625	)
Comprehensive income		$	6,615			$	4,017			$	8,173
Comprehensive income (loss) attributable to non-controlling interests			125				(93	)			205
Comprehensive income attributable to equity holders of the Bank		$	6,490			$	4,110			$	7,968
Preferred shareholders and other equity instrument holders			233				196				182
Common shareholders		$	6,257			$	3,914			$	7,786

The accompanying notes are an integral part of these consolidated financial statements.

 

154  |  2021 Scotiabank Annual Report

Consolidated Statement of Changes in Equity

 

										Accumulated other comprehensive income (loss)
($ millions)		Common shares (Note 24)				Retained earnings(1)				Foreign currency translation				Debt instruments FVOCI				Equity instruments FVOCI				Cash flow hedges				Other(2)				Other reserves				Total common equity				Preferred shares and other equity instruments (Note 24)				Total attributable to equity holders				Non- controlling interests in subsidiaries (Note 31(b))				Total
Balance as at October 31, 2020		$	18,239			$	46,345			$	(1,328	)		$	330			$	(163	)		$	639			$	(1,603	)		$	360			$	62,819			$	5,308			$	68,127			$	2,376			$	70,503
Net income			–				9,391				–				–				–				–				–				–				9,391				233				9,624				331				9,955
Other comprehensive income (loss)			–				–				(3,322	)			(600	)			460				(844	)			1,172				–				(3,134	)			–				(3,134	)			(206	)			(3,340	)
Total comprehensive income		$	–			$	9,391			$	(3,322	)		$	(600	)		$	460			$	(844	)		$	1,172			$	–			$	6,257			$	233			$	6,490			$	125			$	6,615
Shares/instruments issued			268				–				–				–				–				–				–				(25	)			243				2,003				2,246				–				2,246
Shares repurchased/redeemed			–				–				–				–				–				–				–				–				–				(1,259	)			(1,259	)			–				(1,259	)
Dividends and distributions paid to equity holders			–				(4,371	)			–				–				–				–				–				–				(4,371	)			(233	)			(4,604	)			(123	)			(4,727	)
Share-based payments(3)			–				–				–				–				–				–				–				7				7				–				7				–				7
Other			–				(11	)			(59	)			–				(6	)			(9	)			–				(120	)(4)			(205	)			–				(205	)			(288	)(4)			(493	)
Balance as at October 31, 2021		$	18,507			$	51,354			$	(4,709	)		$	(270	)		$	291			$	(214	)		$	(431	)		$	222			$	64,750			$	6,052			$	70,802			$	2,090			$	72,892
Balance as at October 31, 2019		$	18,264			$	44,439			$	800			$	37			$	(55	)		$	650			$	(862	)		$	365			$	63,638			$	3,884			$	67,522			$	2,670			$	70,192
Net income			–				6,582				–				–				–				–				–				–				6,582				196				6,778				75				6,853
Other comprehensive income (loss)			–				–				(2,128	)			293				(81	)			(11	)			(741	)			–				(2,668	)			–				(2,668	)			(168	)			(2,836	)
Total comprehensive income		$	–			$	6,582			$	(2,128	)		$	293			$	(81	)		$	(11	)		$	(741	)		$	–			$	3,914			$	196			$	4,110			$	(93	)		$	4,017
Shares/instruments issued			59				–				–				–				–				–				–				(9	)			50				1,689				1,739				–				1,739
Shares repurchased/redeemed			(84	)			(330	)			–				–				–				–				–				–				(414	)			(265	)			(679	)			–				(679	)
Dividends and distributions paid to equity holders			–				(4,363	)			–				–				–				–				–				–				(4,363	)			(196	)			(4,559	)			(148	)			(4,707	)
Share-based payments(3)			–				–				–				–				–				–				–				5				5				–				5				–				5
Other			–				17				–				–				(27	)			–				–				(1	)			(11	)			–				(11	)			(53	)(4)			(64	)
Balance as at October 31, 2020		$	18,239			$	46,345			$	(1,328	)		$	330			$	(163)			$	639			$	(1,603	)		$	360			$	62,819			$	5,308			$	68,127			$	2,376			$	70,503
Balance as at October 31, 2018		$	18,234			$	41,414			$	1,441			$	(68	)		$	(126	)		$	(121	)		$	(134	)		$	404			$	61,044			$	4,184			$	65,228			$	2,452			$	67,680
Cumulative effect of adopting IFRS 15			–				(58	)			–				–				–				–				–				–				(58	)			–				(58	)			–				(58	)
Balance as at November 1, 2018			18,234				41,356				1,441				(68	)			(126	)			(121	)			(134	)			404				60,986				4,184				65,170				2,452				67,622
Net income			–				8,208				–				–				–				–				–				–				8,208				182				8,390				408				8,798
Other comprehensive income (loss)			–				–				(641	)			105				71				771				(728	)			–				(422	)			–				(422	)			(203	)			(625	)
Total comprehensive income		$	–			$	8,208			$	(641	)		$	105			$	71			$	771			$	(728	)		$	–			$	7,786			$	182			$	7,968			$	205			$	8,173
Shares issued			255				–				–				–				–				–				–				(37	)			218				–				218				–				218
Shares repurchased/redeemed			(225	)			(850	)			–				–				–				–				–				–				(1,075	)			(300	)			(1,375	)			–				(1,375	)
Dividends and distributions paid to equity holders			–				(4,260	)			–				–				–				–				–				–				(4,260	)			(182	)			(4,442	)			(150	)			(4,592	)
Share-based payments(3)			–				–				–				–				–				–				–				7				7				–				7				–				7
Other			–				(15	)			–				–				–				–				–				(9	)			(24	)			–				(24	)			163	(4)			139
Balance as at October 31, 2019		$	18,264			$	44,439			$	800			$	37			$	(55	)		$	650			$	(862	)		$	365			$	63,638			$	3,884			$	67,522			$	2,670			$	70,192

 

(1)	Includes undistributed retained earnings of $60 (2020 – $64; 2019 – $61) related to a foreign associated corporation, which is subject to local regulatory restriction.

(2)	Includes Share from associates, Employee benefits and Own credit risk.

(3)	Represents amounts on account of share-based payments (refer to Note 26).

(4)	Includes changes to non-controlling interests arising from business combinations and related transactions (refer to Note 37).

The accompanying notes are an integral part of these consolidated financial statements

 

2021 Scotiabank Annual Report  |  155

Consolidated Financial Statements

 

Consolidated Statement of Cash Flows

 

Sources (uses) of cash flows for the year ended October 31 ($ millions)		2021(1)				2020(1)				2019
Cash flows from operating activities
Net income		$	9,955			$	6,853			$	8,798
Adjustment for:
Net interest income			(16,961	)			(17,320	)			(17,177	)
Depreciation and amortization			1,511				1,546				1,053
Provision for credit losses			1,808				6,084				3,027
Equity-settled share-based payment expense			7				5				7
Net gain on sale of investment securities			(419	)			(607	)			(351	)
Net (gain)/loss on divestitures			9				(307	)			125
Net income from investments in associated corporations			(339	)			(242	)			(650	)
Income tax expense			2,871				1,543				2,472
Changes in operating assets and liabilities:
Trading assets			(33,995	)			9,945				(27,514	)
Securities purchased under resale agreements and securities borrowed			(14,202	)			12,781				(27,235	)
Loans			(55,748	)			(25,486	)			(44,337	)
Deposits			78,569				27,982				60,705
Obligations related to securities sold short			10,078				1,195				(1,694	)
Obligations related to securities sold under repurchase agreements and securities lent			(7,709	)			11,722				22,727
Net derivative financial instruments			2,123				(1,949	)			1,964
Other, net			(5,300	)			7,527				(8,881	)
Dividends received			969				824				520
Interest received			25,425				29,572				32,696
Interest paid			(8,766	)			(13,042	)			(15,322	)
Income tax paid			(2,693	)			(1,962	)			(2,958	)
Net cash from/(used in) operating activities			(12,807	)			56,664				(12,025	)
Cash flows from investing activities
Interest-bearing deposits with financial institutions			(15,006	)			(30,346	)			18,014
Purchase of investment securities			(72,259	)			(147,629	)			(89,018	)
Proceeds from sale and maturity of investment securities			103,765				119,033				86,956
Acquisition/divestiture of subsidiaries, associated corporations or business units, net of cash			(717	)			3,938				20
Property and equipment, net of disposals			(462	)			(771	)			(186	)
Other, net			(624	)			(684	)			(568	)
Net cash from/(used in) investing activities			14,697				(56,459	)			15,218
Cash flows from financing activities
Proceeds from issue of subordinated debentures			–				–				3,250
Redemption/repurchase of subordinated debentures			(750	)			(9	)			(1,771	)
Proceeds from preferred shares and other equity instruments issued			2,003				1,689				–
Redemption of preferred shares			(1,259	)			(265	)			(300	)
Proceeds from common shares issued			268				59				255
Common shares purchased for cancellation			–				(414	)			(1,075	)
Cash dividends and distributions paid			(4,604	)			(4,559	)			(4,442	)
Distributions to non-controlling interests			(123	)			(148	)			(150	)
Payment of lease liabilities			(344	)			(345	)			–
Other, net			2,032				4,135				2,945
Net cash from/(used in) financing activities			(2,777	)			143				(1,288	)
Effect of exchange rate changes on cash and cash equivalents			(543	)			(129	)			2
Net change in cash and cash equivalents			(1,430	)			219				1,907
Cash and cash equivalents at beginning of year(2)			11,123				10,904				8,997
Cash and cash equivalents at end of year(2)		$	9,693			$	11,123			$	10,904

 

(1)	The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated.

(2)	Represents cash and non-interest bearing deposits with financial institutions (refer to Note 6).

The accompanying notes are an integral part of these consolidated financial statements.

 

156  |  2021 Scotiabank Annual Report

Notes to the 2021 Consolidated Financial Statements

 

Table of Contents

 

 

2021 Scotiabank Annual Report  |  157

Consolidated Financial Statements

 

1	Reporting Entity

The Bank of Nova Scotia (the Bank) is a chartered Schedule I bank under the Bank Act (Canada) (the Bank Act) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank is a global financial services provider offering a diverse range of products and services, including personal, commercial, corporate and investment banking. The head office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia, Canada and its executive offices are at Scotia Plaza, 44 King Street West, Toronto, Ontario, Canada. The common shares of the Bank are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange.

 

2	Basis of Preparation

Statement of compliance

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and accounting requirements of OSFI in accordance with Section 308 of the Bank Act. Section 308 states that, except as otherwise specified by OSFI, the financial statements are to be prepared in accordance with IFRS.

The consolidated financial statements for the year ended October 31, 2021 have been approved by the Board of Directors for issue on November 30, 2021.

Certain comparative amounts have been restated to conform with the basis of presentation in the current year.

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following material items that are measured at fair value in the Consolidated Statement of Financial Position:

 

•

Financial assets and liabilities measured at fair value through profit or loss

•

Financial assets and liabilities designated at fair value through profit or loss

•

Derivative financial instruments

•

Equity instruments designated at fair value through other comprehensive income

•

Debt instruments measured at fair value through other comprehensive income

Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest million unless otherwise stated.

Management’s use of estimates, assumptions and judgments

The Bank’s accounting policies require estimates, assumptions and judgments that relate to matters that are inherently uncertain. The Bank has established procedures to ensure that accounting policies are applied consistently. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised.

Use of estimates and assumptions

The preparation of these consolidated financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements, and other comprehensive income and income and expenses during the reporting period. Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key areas of estimation uncertainty include those relating to the allowance for credit losses, the fair value of financial instruments (including derivatives), corporate income taxes, employee benefits, goodwill and intangible assets, the fair value of all identifiable assets and liabilities as a result of business combinations, impairment of non-financial assets, derecognition of financial assets and liabilities and provisions. The COVID-19 virus continues to have ongoing fading impacts on the markets in which the Bank operates. Sectors in several countries most heavily impacted by COVID-19 since its outset continue to operate below pre-pandemic levels giving rise to elevated uncertainties. The Bank has utilized estimates, assumptions and judgments that reflect this uncertainty. While management makes its best estimates and assumptions, actual results could differ from these and other estimates.

Significant judgments

In the preparation of these consolidated financial statements, management is required to make significant judgments in the classification and presentation of transactions and instruments and accounting for involvement with other entities.

 

158  |  2021 Scotiabank Annual Report

Consolidated Financial Statements

 

Significant estimates, assumptions and judgments have been made in the following areas and are discussed as noted in the consolidated financial statements:

 

Allowance for credit losses		Note 3 Note 13(d)
Fair value of financial instruments		Note 3 Note 7
Corporate income taxes		Note 3 Note 27
Employee benefits		Note 3 Note 28
Goodwill and intangible assets		Note 3 Note 18
Fair value of all identifiable assets and liabilities as a result of business combinations		Note 3 Note 37
Impairment of investment securities		Note 3 Note 12
Impairment of non-financial assets		Note 3 Note 16
Structured entities		Note 3 Note 15
De facto control of other entities		Note 3 Note 31
Derecognition of financial assets and liabilities		Note 3 Note 14
Provisions		Note 3 Note 23

 

3	Significant Accounting Policies

The significant accounting policies used in the preparation of these consolidated financial statements, including any additional accounting requirements of OSFI, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, with the exception of the adoption of IFRS 16, effective November 1, 2019.

Basis of consolidation

The consolidated financial statements include the assets, liabilities, financial performance and cash flows of the Bank and all of its subsidiaries, after elimination of intercompany transactions and balances. Subsidiaries are defined as entities controlled by the Bank and exclude associates and joint arrangements. The Bank’s subsidiaries can be classified as entities controlled through voting interests or structured entities. The Bank consolidates a subsidiary from the date it obtains control. The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. For the Bank to control an entity, all of the three elements of control should be in existence:

 

•

power over the investee;

•

exposure, or rights, to variable returns from involvement with the investee; and

•

the ability to use power over the investee to affect the amount of the Bank’s returns.

The Bank does not control an investee when it is acting as an agent. The Bank assesses whether it is an agent by determining whether it is primarily engaged to act on behalf of and for the benefit of another party or parties. The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the elements of control has changed.

Voting-interest subsidiaries

Control is presumed with an ownership interest of more than 50% of the voting rights in an entity unless there are other factors that indicate that the Bank does not control the entity despite having more than 50% of voting rights.

The Bank may consolidate an entity when it owns less than 50% of the voting rights when it has one or more other attributes of power:

 

•

by virtue of an agreement, over more than half of the voting rights;

•

to govern the financial and operating policies of the entity under a statute or an agreement;

•

to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or

•

to govern the financial and operating policies of the entity through the size of its holding of voting rights relative to the size and dispersion of holding of the other vote holders and voting patterns at shareholder meetings (i.e., de facto control).

Non-controlling interests are presented within equity in the Consolidated Statement of Financial Position separate from equity attributable to equity holders of the Bank. Partial sales and incremental purchases of interests in subsidiaries that do not result in a change of control are accounted for as equity transactions with non-controlling interest holders. Any difference between the carrying amount of the interest and the transaction amount is recorded as an adjustment to retained earnings.

Structured entities

Structured entities are designed to accomplish certain well-defined objectives and for which voting or similar rights are not the dominant factor in deciding who controls the entity. The Bank may become involved with structured entities either at the formation stage or at a later date. The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

 

2021 Scotiabank Annual Report  |  159

Consolidated Financial Statements

 

The Bank consolidates all structured entities that it controls.

Investments in associates

An associate is an entity in which the Bank has significant influence, but not control, over the operating and financial policies of the entity.

Investments in associates are recognized initially at cost, which includes the purchase price and other costs directly attributable to the purchase. Associates are accounted for using the equity method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and other movements in the associate’s equity.

Investments in associates are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in circumstances indicate the existence of objective evidence of impairment.

For purposes of applying the equity method for an investment that has a different reporting period from the Bank, adjustments are made for the effects of any significant events or transactions that occur between the reporting date of the investment and the reporting date of the Bank.

Joint arrangements

The Bank’s investments in joint arrangements over which the Bank has joint control are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement.

Similar to accounting for investment in associates, for joint ventures, investments are recognized initially at cost and accounted for using the equity method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and other movements in the joint venture’s equity. Investments in joint ventures are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in circumstances indicate the existence of objective evidence of impairment.

For joint operations, the Bank recognizes its direct rights to, and its share of jointly held assets, liabilities, revenues and expenses of joint operations. These have been incorporated in the consolidated financial statements under the appropriate headings.

Translation of foreign currencies

The financial statements of each of the Bank’s foreign operations are measured using its functional currency, being the currency of the primary economic environment of the foreign operation.

Translation gains and losses related to the Bank’s monetary items are recognized in non-interest income in the Consolidated Statement of Income. Revenues and expenses denominated in foreign currencies are translated using average exchange rates. Foreign currency non-monetary items that are measured at historical cost are translated into the functional currency at historical rates. Foreign currency non-monetary items measured at fair value are translated into functional currency using the rate of exchange at the date the fair value was determined. Foreign currency gains and losses on non-monetary items are recognized in the Consolidated Statement of Income or Consolidated Statement of Comprehensive Income consistent with the gain or loss on the non-monetary item.

Unrealized gains and losses arising upon translation of foreign operations, together with any gains or losses arising from hedges of those net investment positions to the extent effective, are credited or charged to net change in unrealized foreign currency translation gains/losses in other comprehensive income in the Consolidated Statement of Comprehensive Income. On disposal or meeting the definition of partial disposal of a foreign operation, an appropriate portion of the translation differences previously recognized in other comprehensive income are recognized in the Consolidated Statement of Income.

Financial assets and liabilities

Recognition and initial measurement

The Bank, on the date of origination or purchase, recognizes loans, debt and equity securities, deposits and subordinated debentures at the fair value of consideration paid. Regular-way purchases and sales of financial assets are recognized on the settlement date. All other financial assets and liabilities, including derivatives, are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.

The initial measurement of a financial asset or liability is at fair value plus transaction costs that are directly attributable to its purchase or issuance. For instruments measured at fair value through profit or loss, transaction costs are recognized immediately in profit or loss.

Classification and measurement, derecognition, and impairment of financial instruments

Classification and measurement

Classification and measurement of financial assets

Financial assets include both debt and equity instruments, and are classified into one of the following measurement categories:

 

•

Amortized cost;

•

Fair value through other comprehensive income (FVOCI);

•

Fair value through profit or loss (FVTPL);

•

Elected at fair value through other comprehensive income (Equities only); or

•

Designated at FVTPL

Debt instruments

Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:

 

•

Amortized cost;

•

Fair value through other comprehensive income (FVOCI);

•

Fair value through profit or loss (FVTPL); or

•

Designated at FVTPL

Classification of debt instruments is determined based on:

 

(i)	The business model under which the asset is held; and

(ii)	The contractual cash flow characteristics of the instrument.

 

160  |  2021 Scotiabank Annual Report

Consolidated Financial Statements

 

Business model assessment

Business model assessment involves determining how financial assets are managed in order to generate cash flows. The Bank’s business model assessment is based on the following categories:

 

•

Held to collect: The objective of the business model is to hold assets and collect contractual cash flows. Any sales of the asset are incidental to the objective of the model.

•

Held to collect and for sale: Both collecting contractual cash flows and sales are integral to achieving the objectives of the business model.

•

Other business model: The business model is neither held-to-collect nor held-to-collect and for sale.

The Bank assesses business model at a portfolio level reflective of how groups of assets are managed together to achieve a particular business objective. For the assessment of a business model, the Bank takes into consideration the following factors:

 

•

How the performance of assets in a portfolio is evaluated and reported to group heads and other key decision makers within the Bank’s business lines;

•

How compensation is determined for the Bank’s business lines’ management that manages the assets;

•

How the business lines’ management is compensated for managing the Bank’s assets based on the fair value or the contractual cash flows collected;

•

Whether the assets are held for trading purposes;

•

The risks that affect the performance of assets held within a business model and how those risks are managed; and

•

The frequency and volume of sales in prior periods and expectations about future sales activity.

Contractual cash flow characteristics assessment

The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they give rise to cash flows that are consistent with a basic lending arrangement. Contractual cash flows are consistent with a basic lending arrangement if they represent cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).

Principal is defined as the fair value of the instrument at initial recognition. Principal may change over the life of the instrument due to repayments or amortization of premium/discount.

Interest is defined as the consideration for the time value of money and the credit risk associated with the principal amount outstanding and for other basic lending risks and costs (liquidity risk and administrative costs), and a profit margin.

If the Bank identifies any contractual features that could significantly modify the cash flows of the instrument such that they are no longer consistent with a basic lending arrangement, the related financial asset is classified and measured at FVTPL.

Debt instruments measured at amortized cost

Debt instruments are measured at amortized cost if they are held within a business model whose objective is to hold for collection of contractual cash flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt instruments in this category are carried at amortized cost. Interest income on these instruments is recognized in interest income using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying amount of a financial asset. Amortized cost is calculated by taking into account any discount or premium on acquisition, transaction costs and fees that are an integral part of the effective interest rate.

Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss approach. Loans and debt securities measured at amortized cost are presented net of the allowance for credit losses (ACL) in the Statement of Financial Position.

Debt instruments measured at FVOCI

Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows and for selling financial assets, where the assets’ cash flows represent payments that are solely payments of principal and interest. Subsequent to initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in other comprehensive income (OCI), unless the instrument is designated in a fair value hedge relationship. When designated in a fair value hedge relationship, any changes in fair value due to changes in the hedged risk are recognized in Non-interest income in the Consolidated Statement of Income, along with changes in fair value of the hedging instrument. Upon derecognition, realized gains and losses are reclassified from OCI and recorded in Non-interest income in the Consolidated Statement of Income. Foreign exchange gains and losses that relate to the amortized cost of the debt instrument are recognized in the Consolidated Statement of Income. Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to Interest income in the Consolidated Statement of Income using the effective interest rate method.

Impairment on debt instruments measured at FVOCI is determined using the expected credit loss approach. The ACL on debt instruments measured at FVOCI does not reduce the carrying amount of the asset in the Consolidated Statement of Financial Position, which remains at its fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI with a corresponding charge to Provision for credit losses in the Consolidated Statement of Income. The accumulated allowance recognised in OCI is recycled to the Consolidated Statement of Income upon derecognition of the debt instrument.

Debt instruments measured at FVTPL

Debt instruments are measured at FVTPL if assets:

 

(i)	are held for trading purposes;

(ii)	are held as part of a portfolio managed on a fair value basis; or

(iii)

whose cash flows do not represent payments that are solely payments of principal and interest.

These instruments are measured at fair value in the Consolidated Statement of Financial Position, with transaction costs recognized immediately in the Consolidated Statement of Income as part of Non-interest income. Realized and unrealized gains and losses are recognized as part of Non-interest income in the Consolidated Statement of Income.

Debt instruments designated at FVTPL

Financial assets classified in this category are those that have been designated by the Bank upon initial recognition, and once designated, the designation is irrevocable. The FVTPL designation is available only for those financial assets for which a reliable estimate of fair value can be

 

2021 Scotiabank Annual Report  |  161