# Consolidated financial statements ## Consolidated financial statements | Page | Content | | :--- | :--- | | 95 | Financial reporting responsibility | | 96 | Independent auditor's report - Canadian generally accepted auditing standards | | 99 | Report of independent registered public accounting firm - Standards of the Public Company Accounting Oversight Board (United States) | | 102 | Report of independent registered public accounting firm - Internal control over financial reporting | | 103 | Consolidated balance sheet | | 104 | Consolidated statement of income | | 105 | Consolidated statement of comprehensive income | | 106 | Consolidated statement of changes in equity | | 107 | Consolidated statement of cash flows | | 108 | Notes to the consolidated financial statements | ## Details of the notes to the consolidated financial statements | Page | Note | Description | Page | Note | Description | | :--- | :--- | :--- | :--- | :--- | :--- | | 108 | Note 1 | Basis of preparation and summary of significant accounting policies | 163 | Note 16 | Capital Trust securities | | 123 | Note 2 | Fair value measurement | 164 | Note 17 | Share-based payments | | 131 | Note 3 | Significant transactions | 166 | Note 18 | Post-employment benefits | | 133 | Note 4 | Securities | 172 | Note 19 | Income taxes | | 136 | Note 5 | Loans | 174 | Note 20 | Earnings per share | | 143 | Note 6 | Structured entities and derecognition of financial assets | 175 | Note 21 | Commitments, guarantees and pledged assets | | 146 | Note 7 | Land, buildings and equipment | 177 | Note 22 | Contingent liabilities and provisions | | 147 | Note 8 | Goodwill, software and other intangible assets | 180 | Note 23 | Concentration of credit risk | | 149 | Note 9 | Other assets | 181 | Note 24 | Related-party transactions | | 149 | Note 10 | Deposits | 182 | Note 25 | Investments in equity-accounted associates and joint ventures | | 149 | Note 11 | Other liabilities | 183 | Note 26 | Significant subsidiaries | | 150 | Note 12 | Derivative instruments | 184 | Note 27 | Financial instruments - disclosures | | 154 | Note 13 | Designated accounting hedges | 185 | Note 28 | Offsetting financial assets and liabilities | | 159 | Note 14 | Subordinated indebtedness | 186 | Note 29 | Interest income and expense | | 159 | Note 15 | Common and preferred share capital | 187 | Note 30 | Segmented and geographic information | | 190 | Note 31 | Future accounting policy changes | 94 CIBC 2019 ANNUAL REPORT --- ## Financial reporting responsibility Management of Canadian Imperial Bank of Commerce (CIBC) is responsible for the preparation, presentation, accuracy and reliability of the Annual Report, which includes the consolidated financial statements and management's discussion and analysis (MD&A). The consolidated financial statements have been prepared in accordance with Section 308(4) of the Bank Act (Canada), which requires that the financial statements be prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The MD&A has been prepared in accordance with the requirements of applicable securities laws. The consolidated financial statements and MD&A contain items that reflect the best estimates and judgments of the expected effects of current events and transactions with appropriate consideration to materiality. Financial information appearing throughout the Annual Report is consistent with the consolidated financial statements. Management has developed and maintains effective systems, controls and procedures to ensure that information used internally and disclosed externally is reliable and timely. CIBC's system of internal controls and supporting procedures are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are maintained. These internal controls and supporting procedures include the communication of policies and guidelines, the establishment of an organizational structure that provides appropriate and well-defined responsibilities and accountability, and the careful selection and training of qualified staff. Management has assessed the effectiveness of CIBC's internal control over financial reporting as at year-end using the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based upon this assessment, we have determined that internal control over financial reporting is effective in all material respects and CIBC is in compliance with the requirements set by the U.S. Securities and Exchange Commission (SEC) under the U.S. Sarbanes-Oxley Act and with the Canadian Securities Administrators under Canadian securities laws. CIBC's Chief Executive Officer and Chief Financial Officer have certified CIBC's annual filings with the SEC under the U.S. Sarbanes-Oxley Act and with the Canadian Securities Administrators under Canadian securities laws. The Internal Audit department reviews and reports on the effectiveness of CIBC's internal control, risk management and governance systems and processes, including accounting and financial controls, in accordance with the audit plan approved by the Audit Committee. Our Chief Auditor has unfettered access to the Audit Committee. The Board of Directors oversees management's responsibilities for financial reporting through the Audit Committee, which is composed of independent directors. The Audit Committee reviews CIBC's interim and annual consolidated financial statements and MD&A and recommends them for approval by the Board of Directors. Other key responsibilities of the Audit Committee include monitoring CIBC's system of internal control, and reviewing the qualifications, independence and service quality of the shareholders' auditor and internal auditors. Ernst & Young LLP, the shareholders' auditor, obtains an understanding of CIBC's internal controls and procedures for financial reporting to plan and conduct such tests and other audit procedures as they consider necessary in the circumstances to express their opinions in the reports that follow. Ernst & Young LLP has unrestricted access to the Audit Committee to discuss their audit and related matters. The Office of the Superintendent of Financial Institutions (OSFI) Canada is mandated to protect the rights and interest of depositors and creditors of CIBC. Accordingly, OSFI examines and enquires into the business and affairs of CIBC, as deemed necessary, to ensure that the provisions of the Bank Act (Canada) are being complied with and that CIBC is in sound financial condition. Victor G. Dodig President and Chief Executive Officer Hratch Panossian Chief Financial Officer December 4, 2019 CIBC 2019 ANNUAL REPORT 95 --- ## Independent auditor's report To the shareholders and directors of Canadian Imperial Bank of Commerce ### Opinion We have audited the consolidated financial statements of Canadian Imperial Bank of Commerce (CIBC), which comprise the consolidated balance sheets as at October 31, 2019 and 2018, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and the consolidated statements of cash flows for each of the years in the three-year period ended October 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the "consolidated financial statements"). In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of CIBC as at October 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. ### Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the consolidated financial statements" section of our report. We are independent of CIBC in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. ### Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the year ended October 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the "Auditor's responsibilities for the audit of the consolidated financial statements" section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. | Key audit matter | How our audit addressed the key audit matter | | :--- | :--- | | **Allowance for credit losses** | As more fully described in Note 1 and Note 5 to the consolidated financial statements, CIBC has used an expected credit loss (ECL) model to recognize \$1,915 million in allowances for credit losses on its consolidated balance sheet. ECL allowances represent an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information (FLI), which involves significant judgment, is explicitly incorporated into the estimation of ECL allowances. ECL allowances are measured at amounts equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments that have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. | | | Auditing the allowance for credit losses was complex and required the involvement of specialists due to the inherent complexity of the models, assumptions, judgments and the interrelationship of these variables in measuring the ECL. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include (i) the determination of when a loan has experienced a SICR; (ii) the forecast of FLI for multiple economic scenarios and the probability weighting of those scenarios; (iii) the calculation of both 12-month and lifetime credit losses; and (iv) the application of expert credit judgment. The allowance for credit losses is a significant estimate for which variations in model methodology, assumptions and judgments can have a material effect on the measurement of expected credit losses. | | | We obtained an understanding, evaluated the design and tested the operating effectiveness of management's controls, including those related to technology, over the allowance for credit losses. The controls we tested included, amongst others, controls over model development and validation, economic forecasting, data completeness and accuracy, and the governance and oversight controls over the review of the overall ECL, including the application of expert credit judgment. | | | To test the allowance for credit losses, amongst other procedures, we assessed, with the assistance of our credit risk specialists, whether the methodology and assumptions used in significant models that estimate ECL are consistent with the requirements of IFRS, CIBC's own historical data and industry standards. This included an assessment of the thresholds used to determine a SICR. For a sample of FLI variables, with the assistance of our economic specialists, we evaluated management's forecasting methodology and compared management's FLI to independently derived forecasts and publicly available information. We also evaluated the scenario probability weights used in the ECL models. On a sample basis, we independently recalculated the ECL. We assessed the application of management's expert credit judgment by evaluating that the amounts recorded were reflective of the credit quality and macroeconomic trends, among other factors. We tested the completeness and accuracy of data used in the measurement of the ECL. We also assessed the adequacy of the allowance for credit loss financial statement note disclosures. | | **Fair value measurement of derivatives** | As more fully described in Note 2 and Note 12 of the consolidated financial statements, CIBC has recognized \$24 billion in derivative assets and \$25 billion in derivative liabilities. The portfolio of derivative instruments is presented by level within the fair value hierarchy, with a majority of the portfolio classified as Level 2. While derivative instruments classified as Level 1 have quoted market prices, those classified as Level 2 and 3 require valuation techniques that use observable and non-observable market inputs, and involve the application of management judgment. | | | Auditing the valuation of certain derivatives was complex and required the application of significant auditor judgment, as well as involvement of valuation specialists for those derivatives where the fair value was determined based on complex models and/or where the fair value was calculated based on non-observable market inputs. The significant inputs and assumptions used to determine fair value, among other factors, included interest rates, foreign exchange rates, equity prices, commodity prices, correlations and volatilities. The valuation of derivatives is sensitive to these inputs as they are forward-looking and could be affected by future economic and market conditions. | | | We obtained an understanding, evaluated the design and tested the operating effectiveness of management's controls, including those related to technology, over the valuation of CIBC's derivatives portfolio. For example, we tested controls over the development and validation of models used to determine the fair value of derivatives, as well as controls over the independent price verification process, which includes a review of the significant inputs described above. | | | To test the valuation of these derivatives, our audit procedures included, among others, an evaluation of the methodologies and significant inputs used by CIBC. With the assistance of our valuation specialists, we performed an independent valuation for a sample of derivatives to assess the modelling assumptions and significant inputs used by CIBC to estimate the fair value. We independently obtained significant inputs and assumptions from external market data in performing our independent valuation. For a sample of models and with the assistance of our valuation specialists, we assessed the valuation methodologies used by CIBC to determine fair value. We also assessed the adequacy of the disclosures related to the fair value measurement of derivatives. | | **Measurement of uncertain tax provisions** | CIBC describes its significant accounting judgments, estimates and assumptions in relation to accounting for uncertainty in income taxes in Note 19 of the consolidated financial statements. CIBC operates in a tax environment with constantly evolving and complex tax legislation for financial institutions. Uncertainty in tax positions may arise as tax legislation is subject to interpretation. Estimating uncertain tax provisions requires management judgment to be applied in the interpretation of tax laws across the various jurisdictions in which CIBC operates. This includes judgment in the determination of whether it is probable that CIBC will have to make a payment to tax authorities relating to certain complex tax positions and, when probable, the measurement of such provision when recognized. | | | Auditing the recognition and measurement of CIBC's uncertain tax provisions required the involvement of our tax professionals and the application of judgment, including the interpretation of tax legislation and jurisprudence. | | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management's controls over the recognition and measurement of CIBC's uncertain tax provisions. This included controls over management's assessment of the technical merits of tax positions and the process related to the measurement of any related income tax provisions. | | | With the assistance of our tax professionals, our audit procedures included, among others, an assessment of the technical merits of income tax positions taken by CIBC and any related uncertain tax provisions recorded. Furthermore, we reviewed and evaluated correspondence from the relevant income tax authorities, income tax advice obtained by CIBC from external advisors, and CIBC's internal documentation with respect to uncertain tax positions. We evaluated the reasonability of CIBC's treatment of any new information received during the year relating to the amounts recorded. We evaluated the application of CIBC's accounting policy for income taxes and whether it had been applied consistently and is in accordance with IFRS and assessed the adequacy of income tax disclosures. | ### Other information Management is responsible for the other information. The other information comprises: * Management's discussion and analysis; and * The information, other than the consolidated financial statements and our auditor's report thereon, in the Annual Report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained management's discussion and analysis and the Annual Report prior to the date of this auditor's report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor's report. We have nothing to report in this regard. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 CIBC 2019 ANNUAL REPORT 97 --- ## Report of independent registered public accounting firm To the shareholders and directors of Canadian Imperial Bank of Commerce ### Opinion on the consolidated financial statements We have audited the accompanying consolidated balance sheets of Canadian Imperial Bank of Commerce (CIBC) as of October 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of CIBC at October 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. ### Adoption of IFRS 9 As discussed in Note 1 to the consolidated financial statements, CIBC changed its method of accounting for the classification and measurement of financial instruments in 2018 due to the adoption of IFRS 9 "Financial Instruments". Our opinion is not qualified with respect to this matter. ### Report on internal control over financial reporting We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), CIBC's internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 4, 2019 expressed an unqualified opinion thereon. ### Basis for opinion These consolidated financial statements are the responsibility of CIBC's management. Our responsibility is to express an opinion on CIBC's 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 CIBC 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 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 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 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. CIBC 2019 ANNUAL REPORT 99 --- ## Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing CIBC's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate CIBC or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing CIBC's financial reporting process. ## Auditor's responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CIBC's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on CIBC's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause CIBC to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within CIBC to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 98 CIBC 2019 ANNUAL REPORT --- ## Report of independent registered public accounting firm To the shareholders and directors of Canadian Imperial Bank of Commerce ### Opinion on the consolidated financial statements We have audited the accompanying consolidated balance sheets of Canadian Imperial Bank of Commerce (CIBC) as of October 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of CIBC at October 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. ### Adoption of IFRS 9 As discussed in Note 1 to the consolidated financial statements, CIBC changed its method of accounting for the classification and measurement of financial instruments in 2018 due to the adoption of IFRS 9 "Financial Instruments". Our opinion is not qualified with respect to this matter. ### Report on internal control over financial reporting We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), CIBC's internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 4, 2019 expressed an unqualified opinion thereon. ### Basis for opinion These consolidated financial statements are the responsibility of CIBC's management. Our responsibility is to express an opinion on CIBC's 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 CIBC 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 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 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 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. CIBC 2019 ANNUAL REPORT 99 --- ## Allowance for credit losses **Description of the matter** As more fully described in Note 1 and Note 5 to the consolidated financial statements, CIBC has used an expected credit loss (ECL) model to recognize \$1,915 million in allowances for credit losses on its consolidated balance sheet. ECL allowances represent an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information (FLI), which involves significant judgment, is explicitly incorporated into the estimation of ECL allowances. ECL allowances are measured at amounts equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments that have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. Auditing the allowance for credit losses was complex and required the involvement of specialists due to the inherent complexity of the models, assumptions, judgments and the interrelationship of these variables in measuring the ECL. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include (i) the determination of when a loan has experienced a SICR; (ii) the forecast of FLI for multiple economic scenarios and the probability weighting of those scenarios; (iii) the calculation of both 12-month and lifetime credit losses; and (iv) the application of expert credit judgment. The allowance for credit losses is a significant estimate for which variations in model methodology, assumptions and judgments can have a material effect on the measurement of expected credit losses. **How our audit addressed the key audit matter** We obtained an understanding, evaluated the design and tested the operating effectiveness of management's controls, including those related to technology, over the allowance for credit losses. The controls we tested included, amongst others, controls over model development and validation, economic forecasting, data completeness and accuracy, and the governance and oversight controls over the review of the overall ECL, including the application of expert credit judgment. To test the allowance for credit losses, amongst other procedures, we assessed, with the assistance of our credit risk specialists, whether the methodology and assumptions used in significant models that estimate ECL are consistent with the requirements of IFRS, CIBC's own historical data and industry standards. This included an assessment of the thresholds used to determine a SICR. For a sample of FLI variables, with the assistance of our economic specialists, we evaluated management's forecasting methodology and compared management's FLI to independently derived forecasts and publicly available information. We also evaluated the scenario probability weights used in the ECL models. On a sample basis, we independently recalculated the ECL. We assessed the application of management's expert credit judgment by evaluating that the amounts recorded were reflective of the credit quality and macroeconomic trends, among other factors. We tested the completeness and accuracy of data used in the measurement of the ECL. We also assessed the adequacy of the allowance for credit loss financial statement note disclosures. --- ## Fair value measurement of derivatives **Description of the matter** As more fully described in Note 2 and Note 12 of the consolidated financial statements, CIBC has recognized \$24 billion in derivative assets and \$25 billion in derivative liabilities. The portfolio of derivative instruments is presented by level within the fair value hierarchy, with a majority of the portfolio classified as Level 2. While derivative instruments classified as Level 1 have quoted market prices, those classified as Level 2 and 3 require valuation techniques that use observable and non-observable market inputs, and involve the application of management judgment. Auditing the valuation of certain derivatives was complex and required the application of significant auditor judgment, as well as involvement of valuation specialists for those derivatives where the fair value was determined based on complex models and/or where the fair value was calculated based on non-observable market inputs. The significant inputs and assumptions used to determine fair value, among other factors, included interest rates, foreign exchange rates, equity prices, commodity prices, correlations and volatilities. The valuation of derivatives is sensitive to these inputs as they are forward-looking and could be affected by future economic and market conditions. **How our audit addressed the key audit matter** We obtained an understanding, evaluated the design and tested the operating effectiveness of management's controls, including those related to technology, over the valuation of CIBC's derivatives portfolio. For example, we tested controls over the development and validation of models used to determine the fair value of derivatives, as well as controls over the independent price verification process, which includes a review of the significant inputs described above. To test the valuation of these derivatives, our audit procedures included, among others, an evaluation of the methodologies and significant inputs used by CIBC. With the assistance of our valuation specialists, we performed an independent valuation for a sample of derivatives to assess the modelling assumptions and significant inputs used by CIBC to estimate the fair value. We independently obtained significant inputs and assumptions from external market data in performing our independent valuation. For a sample of models and with the assistance of our valuation specialists, we assessed the valuation methodologies used by CIBC to determine fair value. We also assessed the adequacy of the disclosures related to the fair value measurement of derivatives. --- ## Measurement of uncertain tax provisions **Description of the matter** CIBC describes its significant accounting judgments, estimates and assumptions in relation to accounting for uncertainty in income taxes in Note 19 of the consolidated financial statements. CIBC operates in a tax environment with constantly evolving and complex tax legislation for financial institutions. Uncertainty in tax positions may arise as tax legislation is subject to interpretation. Estimating uncertain tax provisions requires management judgment to be applied in the interpretation of tax laws across the various jurisdictions in which CIBC operates. This includes judgment in the determination of whether it is probable that CIBC will have to make a payment to tax authorities relating to certain complex tax positions and, when probable, the measurement of such provision when recognized. Auditing the recognition and measurement of CIBC's uncertain tax provisions required the involvement of our tax professionals and the application of judgment, including the interpretation of tax legislation and jurisprudence. **How our audit addressed the key audit matter** We obtained an understanding, evaluated the design, and tested the operating effectiveness of management's controls over the recognition and measurement of CIBC's uncertain tax provisions. This included controls over management's assessment of the technical merits of tax positions and the process related to the measurement of any related income tax provisions. With the assistance of our tax professionals, our audit procedures included, among others, an assessment of the technical merits of income tax positions taken by CIBC and any related uncertain tax provisions recorded. Furthermore, we reviewed and evaluated correspondence from the relevant income tax authorities, income tax advice obtained by CIBC from external advisors, and CIBC's internal documentation with respect to uncertain tax positions. We evaluated the reasonability of CIBC's treatment of any new information received during the year relating to the amounts recorded. We evaluated the application of CIBC's accounting policy for income taxes and whether it had been applied consistently and is in accordance with IFRS and assessed the adequacy of income tax disclosures. We have served as CIBC's auditor since 2002. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 CIBC 2019 ANNUAL REPORT 101 --- ## Report of independent registered public accounting firm To the shareholders and directors of Canadian Imperial Bank of Commerce ### Opinion on internal control over financial reporting We have audited Canadian Imperial Bank of Commerce's (CIBC) internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CIBC maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of CIBC as of October 31, 2019 and 2018, and 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, 2019, and the related notes and our report dated December 4, 2019 expressed an unqualified opinion thereon. ### Basis for opinion CIBC's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management's annual report on internal control over financial reporting" section contained in the accompanying management's discussion and analysis. Our responsibility is to express an opinion on CIBC's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CIBC 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. ### Definition and limitations of internal control over financial reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 102 CIBC 2019 ANNUAL REPORT --- ## Consolidated balance sheet Millions of Canadian dollars, as at October 31 | ASSETS | 2019 | 2018 | | :--- | ---: | ---: | | Cash and non-interest-bearing deposits with banks | \$ 3,840 | \$ 4,380 | | Interest-bearing deposits with banks | 13,519 | 13,311 | | Securities (Note 4) | 121,310 | 101,664 | | Cash collateral on securities borrowed | 3,664 | 5,488 | | Securities purchased under resale agreements | 56,111 | 43,450 | | Loans (Note 5) | | | | Residential mortgages | 208,652 | 207,749 | | Personal | 43,651 | 43,058 | | Credit card | 12,755 | 12,673 | | Business and government | 125,798 | 109,555 | | Allowance for credit losses | (1,915) | (1,639) | | | 388,941 | 371,396 | | Other | | | | Derivative instruments (Note 12) | 23,895 | 21,431 | | Customers' liability under acceptances | 9,167 | 10,265 | | Land, buildings and equipment (Note 7) | 1,813 | 1,795 | | Goodwill (Note 8) | 5,449 | 5,564 | | Software and other intangible assets (Note 8) | 1,969 | 1,945 | | Investments in equity-accounted associates and joint ventures (Note 25) | 586 | 526 | | Deferred tax assets (Note 19) | 517 | 601 | | Other assets (Note 9) | 20,823 | 15,283 | | | 64,219 | 57,410 | | **Total assets** | **\$ 651,604** | **\$ 597,099** | | **LIABILITIES AND EQUITY** | | | | Deposits (Note 10) | | | | Personal | \$ 178,091 | \$ 163,879 | | Business and government | 257,502 | 240,149 | | Bank | 11,224 | 14,380 | | Secured borrowings | 38,895 | 42,607 | | | 485,712 | 461,015 | | Obligations related to securities sold short | 15,635 | 13,782 | | Cash collateral on securities lent | 1,822 | 2,731 | | Obligations related to securities sold under repurchase agreements | 51,801 | 30,840 | | Other | | | | Derivative instruments (Note 12) | 25,113 | 20,973 | | Acceptances | 9,188 | 10,296 | | Deferred tax liabilities (Note 19) | 38 | 43 | | Other liabilities (Note 11) | 19,031 | 18,223 | | | 53,370 | 49,535 | | Subordinated indebtedness (Note 14) | 4,684 | 4,080 | | Equity | | | | Preferred shares (Note 15) | 2,825 | 2,250 | | Common shares (Note 15) | 13,591 | 13,243 | | Contributed surplus | 125 | 136 | | Retained earnings | 20,972 | 18,537 | | Accumulated other comprehensive income (AOCI) | 881 | 777 | | Total shareholders' equity | 38,394 | 34,943 | | Non-controlling interests | 186 | 173 | | **Total equity** | **38,580** | **35,116** | | **Total equity** | **\$ 651,604** | **\$ 597,099** | The accompanying notes and shaded sections in "MD&A – Management of risk" are an integral part of these consolidated financial statements. Victor G. Dodig President and Chief Executive Officer Nicholas D. Le Pan Director CIBC 2019 ANNUAL REPORT 103 --- ## Consolidated statement of income Millions of Canadian dollars, except as noted, for the year ended October 31 | | 2019 | 2018 | 2017 | | :--- | ---: | ---: | ---: | | **Interest income**$^{\text{(1)}}$ | | | | | Loans | \$ 16,048 | \$ 13,901 | \$ 11,028 | | Securities | 2,779 | 2,269 | 1,890 | | Securities borrowed or purchased under resale agreements | 1,474 | 1,053 | 495 | | Deposits with banks | 396 | 282 | 180 | | | 20,697 | 17,505 | 13,593 | | **Interest expense** | | | | | Deposits | 8,422 | 6,240 | 3,953 | | Securities sold short | 291 | 272 | 226 | | Securities lent or sold under repurchase agreements | 1,198 | 736 | 254 | | Subordinated indebtedness | 198 | 174 | 142 | | Other | 37 | 18 | 41 | | | 10,146 | 7,440 | 4,616 | | **Net interest income** | **10,551** | **10,065** | **8,977** | | **Non-interest income** | | | | | Underwriting and advisory fees | 475 | 420 | 452 | | Deposit and payment fees | 908 | 877 | 843 | | Credit fees | 958 | 851 | 744 | | Card fees | 458 | 510 | 463 | | Investment management and custodial fees | 1,305 | 1,247 | 1,034 | | Mutual fund fees | 1,595 | 1,624 | 1,573 | | Insurance fees, net of claims | 430 | 431 | 427 | | Commissions on securities transactions | 313 | 357 | 349 | | Gains (losses) from financial instruments measured/designated at fair value through profit or loss (FVTPL), net (2017: Trading income (loss) and designated at fair value (FVO) gains (losses), net) | 761 | 603 | 227 | | Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net (2017: Available-for-sale (AFS) debt and equity securities gains, net) (Note 4) | 34 | (35) | 143 | | Foreign exchange other than trading (FXOTT) | 304 | 310 | 252 | | Income from equity-accounted associates and joint ventures (Note 25) | 92 | 121 | 101 | | Other | 427 | 453 | 695 | | | 8,060 | 7,769 | 7,303 | | **Total revenue** | **18,611** | **17,834** | **16,280** | | Provision for credit losses (Note 5) | 1,286 | 870 | 829 | | **Non-interest expenses** | | | | | Employee compensation and benefits | 5,726 | 5,665 | 5,198 | | Occupancy costs | 892 | 875 | 822 | | Computer, software and office equipment | 1,874 | 1,742 | 1,630 | | Communications | 303 | 315 | 317 | | Advertising and business development | 359 | 327 | 282 | | Professional fees | 226 | 226 | 229 | | Business and capital taxes | 110 | 103 | 96 | | Other (Notes 3 and 8) | 1,366 | 1,005 | 997 | | | 10,856 | 10,258 | 9,571 | | **Income before income taxes** | **6,469** | **6,706** | **5,880** | | Income taxes (Note 19) | 1,348 | 1,422 | 1,162 | | **Net income** | **\$ 5,121** | **\$ 5,284** | **\$ 4,718** | | Net income attributable to non-controlling interests | | | | | Preferred shareholders | \$ 25 | \$ 17 | \$ 19 | | Common shareholders | 111 | 89 | 52 | | **Net income attributable to equity shareholders** | **\$ 5,096** | **\$ 5,267** | **\$ 4,699** | | **Earnings per share (EPS) (in dollars) (Note 20)** | | | | | Basic | \$ 11.22 | \$ 11.69 | \$ 11.26 | | Diluted | 11.19 | 11.65 | 11.24 | | Dividends per common share (in dollars) (Note 15) | 5.60 | 5.32 | 5.08 | $^{\text{(1)}}$ Interest income included \$18.8 billion for the year ended October 31, 2019 (2018: \$16.0 billion) calculated based on the effective interest rate method. The accompanying notes and shaded sections in "MD&A – Management of risk" are an integral part of these consolidated financial statements. 104 CIBC 2019 ANNUAL REPORT --- ## Consolidated statement of comprehensive income Millions of Canadian dollars, for the year ended October 31 | | 2019 | 2018 | 2017 | | :--- | ---: | ---: | ---: | | Net income | \$ 5,121 | \$ 5,284 | \$ 4,718 | | **Other comprehensive income (OCI), net of income tax, that is subject to subsequent reclassification to net income** | | | | | Net foreign currency translation adjustments | (21) | 635 | (1,148) | | Net gains (losses) on investments in foreign operations | (10) | (349) | 772 | | Net gains (losses) on hedges of investments in foreign operations | (31) | 286 | (376) | | Net change in debt securities measured at FVOCI (2017: AFS debt and equity securities) | | | | | Net gains (losses) on securities measured at FVOCI | 244 | (142) | (107) | | Net (gains) losses reclassified to net income | (28) | (29) | (101) | | | 216 | (171) | (101) | | Net change in cash flow hedges | | | | | Net gains (losses) on derivatives designated as cash flow hedges | 137 | (25) | 70 | | Net (gains) losses reclassified to net income | (6) | (26) | (60) | | | 131 | (51) | 10 | | **OCI, net of income tax, that is not subject to subsequent reclassification to net income** | | | | | Net gains (losses) on post-employment defined benefit plans | (220) | 226 | 139 | | Net gains (losses) due to fair value change of FVO liabilities attributable to changes in credit risk | 28 | (2) | (10) | | Net gains (losses) on equity securities designated at FVOCI | (2) | 29 | n/a | | **Total OCI**$^{\text{(1)}}$ | **122** | **317** | **(338)** | | **Comprehensive income** | **\$ 5,243** | **\$ 5,601** | **\$ 4,380** | | **Comprehensive income attributable to non-controlling interests** | **\$ 25** | **\$ 17** | **\$ 19** | | Preferred shareholders | \$ 111 | \$ 89 | \$ 52 | | Common shareholders | 5,107 | 5,495 | 4,309 | | **Comprehensive income attributable to equity shareholders** | **\$ 5,218** | **\$ 5,584** | **\$ 4,361** | $^{\text{(1)}}$ Includes \$44 million of gains for 2019 (2018: \$19 million of losses; 2017: \$24 million of losses) relating to our investments in equity-accounted associates and joint ventures. n/a Not applicable. **Millions of Canadian dollars, for the year ended October 31** | | **2019** | **2018** | **2017** | | :--- | ---: | ---: | ---: | | **Income tax (expense) benefit allocated to each component of OCI** | | | | | **Subject to subsequent reclassification to net income** | | | | | Net foreign currency translation adjustments | \$ | \$ (31) | \$ 42 | | Net gains (losses) on investments in foreign operations | (16) | 43 | (170) | | Net gains (losses) on hedges of investments in foreign operations | (16) | 12 | (128) | | Net change in debt securities measured at FVOCI (2017: AFS debt and equity securities) | | | | | Net gains (losses) on securities measured at FVOCI | (36) | 18 | (23) | | Net (gains) losses reclassified to net income | 10 | 8 | 36 | | | (26) | 26 | 13 | | Net change in cash flow hedges | | | | | Net gains (losses) on derivatives designated as cash flow hedges | (49) | 8 | (23) | | Net (gains) losses reclassified to net income | 2 | 9 | 22 | | | (47) | 17 | (1) | | **Not subject to subsequent reclassification to net income** | | | | | Net gains (losses) on post-employment defined benefit plans | 77 | (87) | (54) | | Net gains (losses) due to fair value change of FVO liabilities attributable to changes in credit risk | (10) | 1 | 4 | | Net gains (losses) on equity securities designated at FVOCI | (11) | n/a | (11) | n/a | | | **\$ (22)** | **\$ (42)** | **\$ (166)** | n/a Not applicable. The accompanying notes and shaded sections in "MD&A – Management of risk" are an integral part of these consolidated financial statements. CIBC 2019 ANNUAL REPORT 105 --- ## Consolidated statement of changes in equity Millions of Canadian dollars, for the year ended October 31 | | 2019 | 2018 | 2017 | | :--- | ---: | ---: | ---: | | **Preferred shares (Note 15)** | | | | | Balance at beginning of year | \$ 2,250 | \$ 1,797 | \$ 1,000 | | Issue of preferred shares | 575 | 450 | 800 | | Treasury shares | | 3 | (3) | | **Balance at end of year** | **\$ 2,825** | **\$ 2,250** | **\$ 1,797** | | **Common shares (Note 15)** | | | | | Balance at beginning of year | \$ 13,243 | \$ 12,548 | \$ 8,026 | | Issued pursuant to the acquisition of The PrivateBank | 3,443 | 126 | | Issued pursuant to the acquisition of Geneva Advisors | 377 | 957 | | Issued pursuant to the acquisition of Wellington Financial | 555 | | | Other issue of common shares | 957 | | | Purchase of common shares for cancellation | (30) | (104) | 1 | | Treasury shares | | (4) | 3 | | **Balance at end of year** | **\$ 13,591** | **\$ 13,243** | **\$ 12,548** | | **Contributed surplus** | | | | | Balance at beginning of year | \$ 136 | \$ 137 | \$ 72 | | Issue of replacement equity-settled awards pursuant to the acquisition of The PrivateBank | 72 | | | Compensation expense arising from equity-settled share-based awards | 16 | 31 | 7 | | Exercise of stock options and settlement of other equity-settled share-based awards | (27) | (32) | (15) | | Other | 1 | | | | **Balance at end of year** | **\$ 125** | **\$ 136** | **\$ 137** | | **Retained earnings** | | | | | Balance at beginning of year | \$ 18,537 | \$ 16,101 | \$ 13,584 | | Impact of adopting IFRS 9 at November 1, 2017 | n/a | (144) | n/a | | Impact of adopting IFRS 15 at November 1, 2018 | 6 | n/a | n/a | | **Balance at beginning of year** | **18,543** | **15,957** | **n/a** | | Net income attributable to equity shareholders | 5,096 | 5,267 | 4,699 | | Dividends (Note 15) | | | | | Preferred | (111) | (89) | (52) | | Common | (2,488) | (2,356) | (2,121) | | Premium on purchase of common shares for cancellation | (79) | (313) | | | Realized gains (losses) on equity securities designated at FVOCI reclassified from AOCI | 18 | 49 | n/a | | Other $^{(1)}$ | (7) | 22 | (9) | | **Balance at end of year** | **\$ 20,972** | **\$ 18,537** | **\$ 16,101** | | **AOCI, net of income tax** | | | | | **AOCI, net of income tax, that is subject to subsequent reclassification to net income** | | | | | Net foreign currency translation adjustments | | | | | Balance at beginning of year | \$ 1,024 | \$ 738 | \$ 1,114 | | Net change in foreign currency translation adjustments | (31) | 286 | (376) | | **Balance at end of year** | **\$ 993** | **\$ 1,024** | **\$ 738** | | Net gains (losses) on debt securities measured at FVOCI (2017: AFS debt and equity securities) | | | | | Balance at beginning of year under IAS 39 | n/a | \$ 60 | \$ 161 | | Impact of adopting IFRS 9 at November 1, 2017 | n/a | (28) | n/a | | **Balance at beginning of year under IFRS 9** | **\$ (139)** | 32 | n/a | | Net change in securities measured at FVOCI | 216 | (171) | (101) | | **Balance at end of year** | **\$ 77** | **\$ (139)** | **\$ 60** | | Net gains (losses) on cash flow hedges | | | | | Balance at beginning of year | \$ (18) | \$ 33 | \$ 23 | | Net change in cash flow hedges | 131 | (51) | 10 | | **Balance at end of year** | **\$ 113** | **\$ (18)** | **\$ 33** | | **AOCI, net of income tax, that is not subject to subsequent reclassification to net income** | | | | | Net gains (losses) on post-employment defined benefit plans | | | | | Balance at beginning of year | \$ (143) | \$ (369) | \$ (508) | | Net change in post-employment defined benefit plans | (220) | 226 | 139 | | **Balance at end of year** | **\$ (363)** | **\$ (143)** | **\$ (369)** | | Net gains (losses) due to fair value change of FVO liabilities attributable to changes in credit risk | | | | | Balance at beginning of year | \$ (12) | \$ (10) | \$ (10) | | Net change attributable to changes in credit risk | 28 | (2) | 4 | | **Balance at end of year** | **\$ 16** | **\$ (12)** | **\$ (10)** | | Net gains (losses) on equity securities designated at FVOCI | | | | | Impact of adopting IFRS 9 at November 1, 2017 | n/a | \$ 85 | n/a | | **Balance at beginning of year under IFRS 9** | 65 | 85 | n/a | | Net gains (losses) on equity securities designated at FVOCI | (2) | 29 | n/a | | Realized gains (losses) on equity securities designated at FVOCI reclassified to retained earnings $^{(2)}$ | (18) | (49) | n/a | | **Balance at end of year** | **\$ 45** | **\$ 65** | **n/a** | | **Total AOCI, net of income tax** | **\$ 881** | **\$ 777** | **\$ 452** | | **Non-controlling interests** | | | | | Balance at beginning of year under IAS 39 | n/a | \$ 202 | \$ 201 | | Impact of adopting IFRS 9 at November 1, 2017 | n/a | (4) | n/a | | **Balance at beginning of year under IFRS 9** | **173** | 198 | n/a | | Net income attributable to non-controlling interests | 25 | 17 | 19 | | Dividends | (11) | (8) | (10) | | Other | (1) | (31) | (8) | | **Balance at end of year** | **\$ 186** | **\$ 173** | **\$ 202** | | **Total equity** | **\$ 38,580** | **\$ 35,116** | **\$ 31,237** | $^{(1)}$ In 2018, includes the recognition of loss carryforwards relating to foreign exchange translation amounts on CIBC's net investment in foreign operations that were previously reclassified to retained earnings as part of our transition to IFRS in 2012. $^{(2)}$ Includes nil reclassified to retained earnings (2018: \$11 million; 2017: n/a), relating to our investments in equity-accounted associates and joint ventures. n/a Not applicable. The accompanying notes and shaded sections in "MD&A – Management of risk" are an integral part of these consolidated financial statements. 106 CIBC 2019 ANNUAL REPORT --- ## Consolidated statement of cash flows Millions of Canadian dollars, for the year ended October 31 | Cash flows provided by (used in) operating activities | 2019 | 2018 | 2017 | | :--- | ---: | ---: | ---: | | Net income | \$ 5,121 | \$ 5,284 | \$ 4,718 | | **Adjustments to reconcile net income to cash flows provided by (used in) operating activities:** | | | | | Provision for credit losses | 1,286 | 870 | 829 | | Amortization and impairment $^{(1)}$ | 838 | 657 | 542 | | Stock options and restricted shares expense | 16 | 31 | 7 | | Deferred income taxes | 108 | 69 | 21 | | Losses (gains) from debt securities measured at FVOCI and amortized cost (2017: AFS debt and equity securities (gains), net) | (34) | 35 | (143) | | Net losses (gains) on disposal of land, buildings and equipment | (7) | (14) | (305) | | Other non-cash items, net | (229) | (292) | (15) | | **Net changes in operating assets and liabilities** | | | | | Interest-bearing deposits with banks | (208) | (2,599) | 394 | | Loans, net of repayments | (17,653) | (16,155) | (30,547) | | Deposits, net of withdrawals | 19,838 | 20,770 | 18,407 | | Obligations related to securities sold short | 1,853 | 69 | 3,375 | | Accrued interest receivable | (122) | (341) | (34) | | Accrued interest payable | 138 | 205 | 90 | | Derivative assets | (2,484) | 2,780 | 3,588 | | Derivative liabilities | 4,037 | (2,084) | (5,549) | | Securities measured at FVTPL (2017: Trading and FVO securities) | (1,826) | (647) | (657) | | Other assets and liabilities designated at fair value (2017: Other FVO assets and liabilities) | 1,222 | (380) | 1,071 | | Current income taxes | (309) | (301) | (1,063) | | Cash collateral on securities lent | (909) | 707 | (494) | | Obligations related to securities sold under repurchase agreements | 20,961 | 2,869 | 16,277 | | Cash collateral on securities borrowed | 1,824 | (453) | 398 | | Securities purchased under resale agreements | (10,785) | (1,195) | (10,556) | | Other, net | (4,041) | (18) | 2,103 | | | **18,635** | **9,867** | **2,457** | | **Cash flows provided by (used in) financing activities** | | | | | Issue of subordinated indebtedness | 1,500 | 1,534 | | | Redemption/repurchase/maturity of subordinated indebtedness | (1,001) | (638) | (55) | | Issue of preferred shares, net of issuance cost | 568 | 445 | 792 | | Issue of common shares for cash | 157 | 186 | 194 | | Purchase of common shares for cancellation | (109) | (417) | 1 | | Net sale (purchase) of treasury shares | 6 | (7) | (7) | | Dividends paid | (2,406) | (2,109) | (1,425) | | | **(1,290)** | **(993)** | **(501)** | | **Cash flows provided by (used in) investing activities** | | | | | Purchase of securities measured/designated at FVOCI and amortized cost (2017: Purchase of AFS securities) | (42,304) | (33,011) | (37,864) | | Proceeds from sale of securities measured/designated at FVOCI and amortized cost (2017: Proceeds from sale of AFS securities) | 13,764 | 12,992 | 18,787 | | Proceeds from maturity of debt securities measured at FVOCI and amortized cost (2017: Proceeds from maturity of AFS securities) | 10,948 | 12,402 | 19,368 | | Cash used in acquisitions, net of cash acquired | (25) | (315) | (2,517) | | Net cash provided by dispositions of investments in equity-accounted associates and joint ventures | (272) | 200 | 60 | | Net sale (purchase) of land, buildings and equipment | (17,889) | (7,987) | (1,965) | | **Effect of exchange rate changes on cash and non-interest-bearing deposits with banks** | **4** | **53** | **(51)** | | **Net increase (decrease) in cash and non-interest-bearing deposits with banks during year** | **(540)** | **940** | **(60)** | | **Cash and non-interest-bearing deposits with banks at beginning of year** | **4,380** | **3,440** | **3,500** | | **Cash and non-interest-bearing deposits with banks at end of year** $^{(2)}$ | **\$ 3,840** | **\$ 4,380** | **\$ 3,440** | | **Cash interest paid** | **\$ 10,008** | **\$ 7,235** | **\$ 4,526** | | **Cash interest received** | **19,840** | **16,440** | **12,611** | | **Cash dividends received** | **735** | **724** | **949** | | **Cash income taxes paid** | **1,549** | **1,654** | **2,204** | $^{(1)}$ Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, goodwill, software and other intangible assets. $^{(2)}$ Includes restricted balance of \$479 million (2018: \$438 million; 2017: \$436 million). The accompanying notes and shaded sections in "MD&A – Management of risk" are an integral part of these consolidated financial statements. CIBC 2019 ANNUAL REPORT 107 --- ## Notes to the consolidated financial statements ### Note 1 Basis of preparation and summary of significant accounting policies #### Basis of preparation The consolidated financial statements of CIBC have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These consolidated financial statements also comply with Section 308(4) of the Bank Act (Canada) and the requirements of the Office of the Superintendent of Financial Institutions (OSFI). CIBC has consistently applied the same accounting policies throughout all periods presented, except for the adoption of IFRS 9 "Financial Instruments" effective November 1, 2017 and the adoption of IFRS 15 "Revenue from Contracts with Customers" effective November 1, 2018, both of which were adopted without restatement of comparative periods as discussed below under the sections titled "Accounting for financial instruments" and "Fee and commission income". These consolidated financial statements are presented in millions of Canadian dollars, unless otherwise indicated. These consolidated financial statements were authorized for issue by the Board of Directors (the Board) on December 4, 2019. #### Summary of significant accounting policies The following paragraphs describe our significant accounting policies. ##### Use of estimates and assumptions The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the recognized and measured amounts of assets, liabilities, net income, comprehensive income and related disclosures. Significant estimates and assumptions are made in the areas of the valuation of financial instruments, allowance for credit losses, the evaluation of whether to consolidate structured entities (SEs), asset impairment, income taxes, provisions and contingent liabilities, post-employment and other long-term benefit plan assumptions and valuation of self-managed loyalty points programs. Actual results could differ from these estimates and assumptions. ##### Basis of consolidation We consolidate entities over which we have control. We have control over another entity when we have: (i) power to direct relevant activities of the entity; (ii) exposure, or rights, to variable returns from our involvement with the entity; and (iii) the ability to affect those returns through our power over the entity. ###### Subsidiaries Subsidiaries are entities over which CIBC has control. Generally, CIBC has control of its subsidiaries through a shareholding of more than 50% of the voting rights, and has significant exposure to the subsidiaries based on its ownership interests of more than 50%. The effects of potential voting rights that CIBC has the practical ability to exercise are considered when assessing whether control exists. Subsidiaries are consolidated from the date control is obtained by CIBC and are deconsolidated from the date control is lost. Consistent accounting policies are applied for all consolidated subsidiaries. Details of our significant subsidiaries are provided in Note 26. ###### Structured entities An SE is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the significant relevant activities are directed by contractual arrangements. SEs often have some or all of the following features or attributes: (i) restricted activities; (ii) a narrow and well-defined objective, such as to securitize our own financial assets or third-party financial assets to provide sources of funding or to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the SE to investors; (iii) insufficient equity to permit the SE to finance its activities without subordinated financial support; or (iv) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks. Examples of SEs include securitization vehicles, asset-backed financings, and investment funds. When voting rights are not relevant in deciding whether CIBC has power over an entity, particularly for complex SEs, the assessment of control considers all facts and circumstances, including the purpose and design of the investee, its relationship with other parties and each party's ability to make decisions over significant activities, and whether CIBC is acting as a principal or as an agent. Consolidation conclusions are reassessed whenever there is a change in the specific facts and circumstances relevant to one or more of the three elements of control. Factors that trigger the reassessment include, but are not limited to, significant changes in ownership structure of the entities, changes in contractual or governance arrangements, provision of a liquidity facility beyond the original terms, transactions with the entities that were not contemplated originally and changes in the financing structure of the entities. ##### Transactions eliminated on consolidation All intercompany transactions, balances and unrealized gains and losses on transactions are eliminated on consolidation. ##### Non-controlling interests Non-controlling interests are presented on the consolidated balance sheet as a separate component of equity that is distinct from CIBC's shareholders' equity. The net income attributable to non-controlling interests is presented separately in the consolidated statement of income. 108 CIBC 2019 ANNUAL REPORT --- ## Associates and joint ventures We classify investments in entities over which we have significant influence, and that are neither subsidiaries nor joint ventures, as associates. Significant influence is presumed to exist where we hold, either directly or indirectly, between 20% and 50% of the voting rights of an entity, or, in the case of a limited partnership, where CIBC is a co-general partner. Significant influence also may exist where we hold less than 20% of the voting rights of an entity, for example if we have influence over policy-making processes through representation on the entity's Board of Directors, or by other means. Where we are a party to a contractual arrangement whereby, together with one or more parties, we undertake an economic activity that is subject to joint control, we classify our interest in the venture as a joint venture. Investments in associates and interests in joint ventures are accounted for using the equity method. Under the equity method, such investments are initially measured at cost, including attributable goodwill and intangible assets, and are adjusted thereafter for the post-acquisition change in our share of the net assets of the investment. In applying the equity method for an investment that has a different reporting period from that of CIBC, adjustments are made for the effects of any significant events or transactions that occur between the reporting date of the investment and CIBC's reporting date. ## Foreign currency translation Monetary assets and liabilities and non-monetary assets and liabilities measured at fair value that are denominated in foreign currencies are translated into the functional currencies of operations at prevailing exchange rates at the date of the consolidated balance sheet. Revenue and expenses are translated using average monthly exchange rates. Realized and unrealized gains and losses arising from translation into functional currencies are included in the consolidated statement of income, with the exception of unrealized foreign exchange gains and losses on FVOCI equity securities, which are included in AOCI. Assets and liabilities of foreign operations with a functional currency other than the Canadian dollar, including goodwill and fair value adjustments arising on acquisition, are translated into Canadian dollars at the exchange rates prevailing as at the consolidated balance sheet date, while revenue and expenses of these foreign operations are translated into Canadian dollars at the average monthly exchange rates. Exchange gains and losses arising from the translation of these foreign operations and from the results of hedging the net investment in these foreign operations, net of applicable taxes, are included in Net foreign currency translation adjustments, in AOCI. Any accumulated exchange gains and losses, including the impact of hedging, and any applicable taxes in AOCI are reclassified into the consolidated statement of income when there is a disposal of a foreign operation, including a partial disposal of a foreign operation that involves the loss of control. On partial disposal of a foreign operation that does not involve the loss of control, the proportionate share of the accumulated exchange gains and losses, including the impact of hedging, and any applicable taxes previously recognized in AOCI are reclassified into the consolidated statement of income. ## Accounting for financial instruments CIBC adopted IFRS 9 "Financial Instruments" (IFRS 9) in place of IAS 39 "Financial Instruments: Recognition and Measurement" (IAS 39) as of November 1, 2017 to comply with OSFI's advisory that requires that domestic systemically important banks (D-SIBs) adopt IFRS 9 for their annual periods beginning on November 1, 2017, one year earlier than required by the IASB. We applied IFRS 9 on a retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements. Amounts reported relating to the year ended October 31, 2017 are reported under IAS 39 and are therefore not comparable to the information presented for 2018 or 2019. The adoption of IFRS 9 in the first quarter of 2018 resulted in changes in accounting policy in two principal areas, classification and measurement and impairment, as described in more detail below. We had previously early adopted the "own credit" provisions of IFRS 9 as of November 1, 2014 and we have elected, as a policy choice permitted under IFRS 9, to continue to apply the hedge accounting requirements of IAS 39. ### Classification and measurement of financial instruments under IAS 39 CIBC recognizes financial instruments on its consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. Under IAS 39, all financial assets were classified at initial recognition as trading, AFS, fair value option (FVO), held-to-maturity (HTM), or loans and receivables, based on the purpose for which the instrument was acquired and its characteristics. All financial assets and derivatives were required to be measured at fair value with the exception of loans and receivables, debt securities classified as HTM, and AFS equity instruments whose fair value could not be reliably measured. Reclassification of non-derivative financial assets out of trading to loans and receivables was allowed when they were no longer held for trading, and if they met the definition of loans and receivables and we had the intention and ability to hold the financial assets for the foreseeable future or until maturity. Reclassification of non-derivative financial assets out of trading to AFS was also allowed under rare circumstances. Non-derivative financial assets could be reclassified out of AFS to loans and receivables if they met the definition of loans and receivables and we had the intention and ability to hold the financial assets for the foreseeable future or until maturity, or reclassified out of AFS to HTM if we had the intention to hold the financial assets until maturity. Financial liabilities, other than derivatives, obligations related to securities sold short and FVO liabilities, were measured at amortized cost. Derivatives, obligations related to securities sold short and FVO liabilities were measured at fair value. Interest expense was recognized on an accrual basis using the effective interest rate method. #### Loans and receivables Under IAS 39, loans and receivables were defined as non-derivative financial assets with fixed or determinable payments that did not have a quoted market price in an active market and for which we did not intend to sell immediately or in the near term at the time of inception. Loans and receivables were recognized initially at fair value, which represents the cash advanced to the borrower plus direct and incremental transaction costs. Subsequently, they were measured at amortized cost, using the effective interest rate method, net of an allowance for credit losses. Interest income was recognized on an accrual basis using the effective interest rate method. Certain loans and receivables could be designated at fair value (see below). #### Trading financial instruments Under IAS 39, trading financial instruments were defined as assets and liabilities that were held for trading activities or that were part of a managed portfolio with a pattern of short-term profit-taking. These were measured initially at fair value. Loans and receivables that we intended to sell immediately or in the near term were classified as trading financial instruments. Trading financial instruments were remeasured at fair value as at the consolidated balance sheet date. Gains and losses realized on disposition and unrealized gains and losses from changes in fair value were included in Non-interest income as Trading income (loss), except to the extent they were economically hedging an FVO asset or liability, in which case the gains and losses were included in FVO gains (losses), net. Dividends and interest income earned on trading securities and dividends and interest expense incurred on securities sold short were included in Interest income and Interest expense, respectively. ### AFS financial assets Under IAS 39, AFS financial assets were defined as non-derivative financial assets that were not classified as trading, FVO or loans and receivables, and were measured initially at fair value, plus direct and incremental transaction costs. Only equity instruments whose fair value could not be reliably measured were measured at cost. We determined that all of our equity securities had reliable fair values. As a result, all AFS financial assets were remeasured at FVOCI subsequent to initial recognition, except that foreign exchange gains or losses on AFS debt instruments were recognized in the consolidated statement of income. Unrealized foreign exchange gains or losses on AFS equity securities, along with all other fair value changes, were recognized in OCI until the investment was sold or impaired, whereupon the cumulative gains and losses previously recognized in OCI were transferred from AOCI to the consolidated statement of income. Realized gains and losses on sale, determined on an average cost basis, and write-downs to reflect impairment were included in AFS securities gains (losses), net. Dividends and interest income from AFS financial assets were included in Interest income. ### Designated at fair value financial instruments Under IAS 39, FVO financial instruments were defined as those that we designated on initial recognition as instruments that we would measure at fair value through the consolidated statement of income. This designation, once made, was irrevocable. In addition to the requirement that reliable fair values were available, there were restrictions imposed by IFRS and by OSFI on the use of this designation. The criteria for applying the FVO at inception were met when: (i) the application of the FVO eliminated or significantly reduced the measurement inconsistency that otherwise would arise from measuring assets or liabilities on a different basis; or (ii) the financial instruments were part of a portfolio which was managed on a fair value basis, in accordance with our investment strategy, and were reported internally on that basis. FVO could also be applied to financial instruments that had one or more embedded derivatives that would otherwise require bifurcation as they significantly modified the cash flows of the contract. Gains and losses realized on dispositions and unrealized gains and losses from changes in fair value of FVO financial instruments, and gains and losses arising from changes in fair value of derivatives, trading securities and obligations related to securities sold short that were managed as economic hedges of the FVO financial instruments, were included in FVO gains (losses), net under IAS 39 and Gains and losses on derivatives are included in Gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9. Dividends and interest earned and interest expense incurred on FVO assets and liabilities were included in Interest income and Interest expense, respectively. Changes in the fair value of FVO liabilities that were attributable to changes in own credit risk were recognized in OCI. ### Classification and measurement of financial instruments under IFRS 9 Under IFRS 9, all financial assets must be classified at initial recognition as financial instruments mandatorily measured at FVTPL (trading and non-trading), financial instruments measured at amortized cost, debt financial instruments measured at FVOCI, equity financial instruments designated at FVOCI, or financial instruments designated at FVTPL, based on the contractual cash flow characteristics of the financial assets and the business model under which the financial assets are managed. All financial assets and derivatives are required to be measured at fair value with the exception of financial assets measured at amortized cost. Financial assets are required to be reclassified when and only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date. The IFRS 9 classification and measurement model requires that all debt instrument financial assets that do not meet a "solely payment of principal and interest" (SPPI) test, including those that contain embedded derivatives, be classified at initial recognition as FVTPL. The SPPI test is conducted to identify whether the contractual cash flows of a financial instrument are "solely payments of principal and interest" such that any variability in the contractual cash flows is consistent with a "basic lending arrangement". "Principal" for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset, for example, due to repayments of principal or amortization of the premium/discount. "Interest" for the purpose of this test is defined as the consideration for the time value of money and credit risk, which are the most significant elements of interest within a lending arrangement. Contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. The intent of the SPPI test is to ensure that debt instruments that contain non-basic lending features, such as conversion options and equity-linked payouts, are measured at FVTPL. For debt instrument financial assets that meet the SPPI test, classification at initial recognition is determined based on the business model under which these instruments are managed. Debt instruments that are managed on a "held for trading" or "fair value" basis are classified as FVTPL. Debt instruments that are managed on a "hold to collect and for sale" basis are classified as FVOCI for debt. Debt instruments that are managed on a "hold to collect" basis are classified as amortized cost. We consider the following in our determination of the applicable business model for financial assets: 1. The business purpose of the portfolio; 2. The risks that are being managed and the type of business activities that are being carried out on a day-to-day basis to manage the risks; 3. The basis on which performance of the portfolio is being evaluated; and 4. The frequency and significance of sales activity. All equity instrument financial assets are classified at initial recognition as FVTPL unless they are not held with the intent for short-term profit-taking and an irrevocable designation is made to classify the instrument as FVOCI for equities. The classification and measurement of financial liabilities remain essentially unchanged from the IAS 39 requirements, except that changes in the fair value of liabilities designated at FVTPL using the FVO which are attributable to changes in own credit risk are presented in OCI, rather than profit or loss. We early adopted the "own credit" provisions of IFRS 9 as of November 1, 2014. Derivatives continue to be measured at FVTPL under IFRS 9, except to the extent that they are designated in a hedging relationship, in which case the IAS 39 hedge accounting requirements continue to apply. #### Financial instruments mandatorily measured at FVTPL (trading and non-trading) Under IFRS 9, trading financial instruments are mandatorily measured at FVTPL as they are held for trading purposes or are part of a managed portfolio with a pattern of short-term profit-taking. Non-trading financial assets are also mandatorily measured at fair value if their contractual cash flow characteristics do not meet the SPPI test or if they are managed together with other financial instruments on a fair value basis. Trading and non-trading financial instruments mandatorily measured at FVTPL are remeasured at fair value as at the consolidated balance sheet date. Gains and losses realized on disposition and unrealized gains and losses from changes in fair value are included in Non-interest income as Gains (losses) from financial instruments measured/designated at FVTPL, net. Interest income and dividends earned on trading and non-trading securities and dividends and interest expense incurred on securities sold short are included in Interest income and Interest expense, respectively. #### Financial instruments designated at FVTPL (fair value option) Under IFRS 9, financial instruments designated at FVTPL are those that we voluntarily designate at initial recognition as instruments that we will measure at fair value through the consolidated statement of income that would otherwise fall into a different accounting category. As was the case under IAS 39, the FVO designation, once made, is irrevocable and can only be applied if reliable fair values are available, when doing so eliminates or significantly reduces the measurement inconsistency that would otherwise arise from measuring assets or liabilities on a different basis and if certain OSFI requirements are met. Financial liabilities may also be designated at FVTPL when they are part of a portfolio which is managed on a fair value basis, in accordance with our investment strategy, and are reported internally on that basis. Designation at FVTPL may also be applied to financial liabilities that have one or more embedded derivatives that would otherwise require bifurcation. Unlike IAS 39, however, there is no need to apply FVO to equity instruments as the default accounting is financial instruments mandatorily measured at FVTPL. As was the case under IAS 39, we apply the FVO to certain mortgage commitments. Gains and losses realized on dispositions and unrealized gains and losses from changes in the fair value of FVO financial instruments are treated in the same manner as financial instruments which are mandatorily measured at FVTPL, except that changes in the fair value of FVO liabilities that are attributable to changes in own credit risk are recognized in OCI. Dividends and interest earned and interest expense incurred on FVO assets and liabilities are included in Interest income and Interest expense, respectively. #### Financial assets measured at amortized cost Under IFRS 9, financial assets measured at amortized cost are debt financial instruments with contractual cash flows that meet the SPPI test and are managed on a "hold to collect" basis. These financial assets are recognized initially at fair value plus or minus direct and incremental transaction costs, and are subsequently measured at amortized cost, using the effective interest rate method, net of an allowance for expected credit losses (ECL). Consistent with IAS 39, loans measured at amortized cost under IFRS 9 include residential mortgages, personal loans, credit cards and most business and government loans. Most securities classified as HTM under IAS 39 and certain portfolios of treasury securities that were classified as AFS under IAS 39 (but which are managed on a "hold to collect" basis) are also classified as amortized cost under IFRS 9. Also consistent with IAS 39, most deposits with banks, securities purchased under resale agreements, cash collateral on securities borrowed and most customers' liability under acceptances are accounted for at amortized cost under IFRS 9. #### Debt financial assets measured at FVOCI Under IFRS 9, debt financial instruments measured at FVOCI are non-derivative financial assets with contractual cash flows that meet the SPPI test and are managed on a "hold to collect and for sale" basis. Subsequent measurement of debt instruments classified at FVOCI under IFRS 9 operates in a similar manner to AFS debt securities under IAS 39, except that the ECL impairment model must be applied to these instruments under IFRS 9. As a result, FVOCI debt instruments are measured initially at fair value, plus direct and incremental transaction costs. Subsequent to initial recognition, FVOCI debt instruments are remeasured at FVOCI, with the exception that changes in ECL allowances in addition to related foreign exchange gains or losses are recognized in the consolidated statement of income. Cumulative gains and losses previously recognized in OCI are transferred from AOCI to the consolidated statement of income when the debt instrument is sold. Realized gains and losses on sale, determined on an average cost basis, and changes in ECL allowances, are included in Gains (losses) from debt securities measured at FVOCI and amortized cost, net in the consolidated statement of income. Interest income from FVOCI debt instruments is included in Interest income. FVOCI debt instruments include our treasury securities which are managed on a "hold to collect and for sale" basis. A debt financial instrument is classified as impaired (stage 3) when one or more events that have a detrimental impact on the estimated future cash flows of that financial instrument have occurred after its initial recognition. Evidence of impairment includes indications that the borrower is experiencing significant financial difficulties, or a default or delinquency has occurred. #### Equity financial instruments designated at FVOCI Under IFRS 9, equity financial instruments are measured at FVTPL unless an irrevocable designation is made to measure them at FVOCI. Gains or losses from changes in the fair value of equity instruments designated at FVOCI, including any related foreign exchange gains or losses, are recognized in OCI. In contrast to AFS equity securities under IAS 39, amounts recognized in OCI will not be subsequently recycled to profit or loss, with the exception of dividends, which are recognized as interest income when received in the consolidated statement of income. Instead, cumulative gains or losses upon derecognition of the equity instrument will be transferred within equity from AOCI to retained earnings and presented in Realized gains (losses) on equity securities designated at FVOCI reclassified to retained earnings in the consolidated statement of changes in equity. Financial assets designated as FVOCI include non-trading equity securities, primarily related to our investment in private companies and limited partnerships. ### Impairment of financial assets under IAS 39 We classified a loan as impaired when, in our opinion, there was objective evidence of impairment as a result of one or more loss events that occurred after initial recognition of the loans with a negative impact on the estimated future cash flows of a loan or a portfolio of loans. Objective evidence of impairment included indications that the borrower was experiencing significant financial difficulties, or a default or delinquency had occurred. Generally, loans on which repayment of principal or payment of interest was contractually 90 days in arrears were automatically considered impaired unless they were fully secured and in the process of collection. Notwithstanding management's assessment of collectability, such loans were considered impaired if payments were 180 days in arrears. Exceptions were as follows: * Credit card loans were not classified as impaired and were fully written off at the earlier of the notice of bankruptcy, settlement proposal, enlistment of credit counselling services, or when payments were contractually 180 days in arrears. * Loans guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were classified as impaired only when payments were contractually 365 days in arrears. In certain circumstances, we could modify a loan for economic or legal reasons related to a borrower's financial difficulties. Once a loan was modified, if management still did not expect full collection of payments under the modified loan terms, the loan was classified as impaired. An impaired loan was measured at its estimated realizable value determined by discounting the expected future cash flows at the loan's original effective interest rate. When a loan or a group of loans had been classified as impaired, interest income was recognized thereafter using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. For credit card loans, interest was accrued only to the extent that there was an expectation of receipt. A loan was no longer considered impaired when all past due amounts, including interest, had been recovered, and it was determined that the principal and interest were fully collectable in accordance with the original contractual terms or revised market terms of the financial instrument with all criteria for the impaired classification having been remedied. Once a loan was modified and management expected full collection of payments under the modified loan terms, the loan was not considered impaired. No portion of cash received on an impaired loan was recognized in the consolidated statement of income until the loan returned to unimpaired status. Loans were written off, either partially or in full, against the related allowance for credit losses when we judged that there was no realistic prospect of future recovery in respect of amounts written off. When loans were secured, this was generally after all collateral had been realized or transferred to CIBC, or in certain circumstances, when the net realizable value of any collateral and other available information suggested that there was no reasonable expectation of further recovery. In subsequent periods, any recoveries of amounts previously written off were credited to the provision for credit losses. ### Allowance for credit losses Under IAS 39, allowance for credit losses consisted of individual and collective components: #### Individual allowance We conducted ongoing credit assessments of the majority of the business and government loan portfolios on an account-by-account basis at each reporting date and we established an allowance for credit losses when there was objective evidence that a loan is impaired. #### Collective allowance Loans were grouped in portfolios of similar credit risk characteristics and impairment was assessed on a collective basis in two circumstances: (i) Incurred but not yet identified credit losses - for groups of individually assessed loans for which no objective evidence of impairment had been identified on an individual basis: * A collective allowance was provided for losses which we estimated were inherent in the business and government portfolio as at the reporting date, but which had not yet been specifically identified from an individual assessment of the loan. * The collective allowance was established with reference to expected loss rates associated with different credit portfolios at different risk levels and the estimated time period for losses that were present but yet to be specifically identified. We also considered estimates of the time periods over which losses that were present would be identified and a provision taken, our view of economic and portfolio trends, and evidence of credit quality improvements or deterioration. The period between a loss occurring and its identification was estimated by management for each identified portfolio. The parameters that affected the collective allowance calculation were updated regularly, based on our experience and that of the market in general. * Expected loss rates were based on the risk rating of each credit facility and on the probability of default (PD) factors, as well as estimates of loss given default (LGD) associated with each risk rating. The PD factors reflected our historical loss experience and were supplemented by data derived from defaults in the public debt markets. Historical loss experience was adjusted based on current observable data to reflect the effects of current conditions. LGD estimates were based on our experience over past years. (ii) For groups of loans where each loan was not considered to be individually significant: * Residential mortgages, credit card loans, personal loans, and certain small business loan portfolios consisted of large numbers of homogeneous balances of relatively small amounts, for which collective allowances were established by reference to historical ratios of write-offs to current accounts and balances in arrears. * For residential mortgages, personal loans and certain small business loans, this historical loss experience enabled CIBC to determine appropriate PD and LGD parameters, which were used in the calculation of the collective allowance. For credit card loans, the historical loss experience enabled CIBC to calculate roll-rate models in order to determine an allowance amount driven by flows to write-off. * We also considered estimates of the time periods over which losses that were present would be identified and a provision taken, our view of current and ongoing economic and portfolio trends, and evidence of credit quality improvements or deterioration. The parameters that affected the collective allowance calculation were updated regularly, based on our experience and that of the market in general. Individual and collective allowances were provided for off-balance sheet credit exposures that were not measured at fair value. These allowances were included in Other liabilities. ### AFS debt instruments An AFS debt instrument was identified as impaired when there was objective observable evidence about our inability to collect the contractual principal or interest. When an AFS debt instrument was determined to be impaired, an impairment loss was recognized by reclassifying the cumulative unrealized losses in AOCI to the consolidated statement of income. Impairment losses previously recognized in the consolidated statement of income were reversed in the consolidated statement of income if the fair value subsequently increases and the increase could be objectively determined to relate to an event occurring after the impairment loss was recognized. ### AFS equity instruments Objective evidence of impairment for an investment in an AFS equity instrument existed if there had been a significant or prolonged decline in the fair value of the investment below its cost, or if there was information about significant adverse changes in the technological, market, economic, or legal environment in which the issuer operates, or if the issuer was experiencing significant financial difficulty. When an AFS equity instrument was determined to be impaired, an impairment loss was recognized by reclassifying the cumulative unrealized losses in AOCI to the consolidated statement of income. Impairment losses previously recognized in the consolidated statement of income could not be subsequently reversed. Further decreases in fair value subsequent to the recognition of an impairment loss were recognized directly in the consolidated statement of income, and subsequent increases in fair value were recognized in OCI. ### Impairment of financial assets under IFRS 9 Under IFRS 9, ECL allowances are recognized on all financial assets that are debt instruments classified either as amortized cost or FVOCI and for all loan commitments and financial guarantees that are not measured at FVTPL. The application of an ECL model represents a significant change from the incurred loss model under IAS 39. ECL allowances represent credit losses that reflect an unbiased and probability-weighted amount which is determined by evaluating a range of possible outcomes, the time value of money and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information is explicitly incorporated into the estimation of ECL allowances, which involves significant judgment (see Note 5 for additional details). In contrast, the incurred loss model under IAS 39 incorporated a single best estimate, the time value of money and information about past events and current conditions. ECL allowances for loans and acceptances are included in allowance for credit losses on the consolidated balance sheet. ECL allowances for FVOCI debt securities are included as a component of the carrying value of the securities, which are measured at fair value. ECL allowances for other financial assets are included in the carrying value of the instrument. ECL allowances for guarantees and loan commitments are included in other liabilities. 112 CIBC 2019 ANNUAL REPORT --- ECL allowances are measured at amounts equal to either: (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments which have experienced a significant increase in credit risk since initial recognition or when there is objective evidence of impairment. In contrast, under the incurred loss model lifetime credit losses were recognized when there was objective evidence of impairment and allowances for incurred but not identified credit losses were also recognized. The calculation of ECL allowances is based on the expected value of three probability-weighted scenarios to measure the expected cash shortfalls, discounted at the effective interest rate. A cash shortfall is the difference between the contractual cash flows that are due and the cash flows that we expect to receive. The key inputs in the measurement of ECL allowances are as follows: * The PD is an estimate of the likelihood of default over a given time horizon; * The LGD is an estimate of the loss arising in the case where a default occurs at a given time; and * The exposure at default (EAD) is an estimate of the exposure at a future default date. Lifetime ECL is the expected credit losses that result from all possible default events over the expected life of a financial instrument. 12-month ECL is the portion of lifetime expected credit losses that represent the expected credit losses that result from default events on the financial instrument that are possible within the 12 months after the reporting date. Due to the inclusion of relative credit deterioration criteria and consideration of forward-looking information, lifetime credit losses are generally recognized earlier under IFRS 9. ### Stage migration and significant increase in credit risk As a result of the requirements above, financial instruments subject to ECL allowances are categorized into three stages. **For performing financial instruments:** Stage 1 is comprised of all performing financial instruments which have not experienced a significant increase in credit risk since initial recognition. We recognize 12 months of ECL for stage 1 financial instruments. In assessing whether credit risk has increased significantly, we compare the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of its initial recognition. Stage 2 is comprised of all performing financial instruments which have experienced a significant increase in credit risk since initial recognition. We recognize lifetime ECL for stage 2 financial instruments. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, then we revert to recognizing 12 months of ECL as the financial instrument has migrated back to stage 1. We determine whether a financial instrument has experienced a significant increase in credit risk since its initial recognition on an individual financial instrument basis. Changes in the required ECL allowance, including the impact of financial instruments migrating between stage 1 and stage 2, are recorded in Provision for credit losses in the consolidated statement of income. Significant judgment is required in the application of significant increase in credit risk (see Note 5 for additional details). Stage 3 financial instruments are those that we have classified as impaired. We recognize lifetime ECL for all stage 3 financial instruments. We classify a financial instrument as impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial instrument have occurred after its initial recognition. Evidence of impairment includes indications that the borrower is experiencing significant financial difficulties, or a default or delinquency has occurred. Under IFRS 9, all financial instruments on which repayment of principal or payment of interest is contractually 90 days in arrears are automatically considered impaired, except for credit card loans, which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was the same under IAS 39, except that under IAS 39: (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were classified as impaired only when payments were contractually 365 days in arrears; and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection, were classified as impaired only when payments were contractually 180 days in arrears. A financial instrument is no longer considered impaired when all past due amounts, including interest, have been recovered, and it is determined that the principal and interest are fully collectable in accordance with the original contractual terms or revised market terms of the financial instrument with all criteria for the impaired classification having been remedied. Financial instruments are written off, either partially or in full, against the related allowance for credit losses when we judge that there is no realistic prospect of future recovery in respect of those amounts. When financial instruments are secured, this is generally after all collateral has been realized or transferred to CIBC, or in certain circumstances, when the net realizable value of any collateral and other available information suggests that there is no reasonable expectation of further recovery. In subsequent periods, any recoveries of amounts previously written off are credited to the provision for credit losses. ### Purchased loans Both purchased performing and purchased credit-impaired loans are initially measured at their acquisition date fair values. As a result of recording these loans at fair value, no allowance for credit losses is recognized in the purchase equation at the acquisition date under either IAS 39 or IFRS 9. Fair value is determined by estimating the principal and interest cash flows expected to be collected and discounting those cash flows at a market rate of interest. At the acquisition date, we classify a loan as performing where we expect timely collection of all amounts in accordance with the original contractual terms of the loan and as credit-impaired where it is probable that we will not be able to collect all contractually required payments. For purchased performing loans, the acquisition date fair value adjustment on each loan is amortized to interest income over the expected remaining life of the loan using the effective interest rate method under both IAS 39 and IFRS 9. The remaining unamortized amounts relating to those loans are recorded in income in the period that the loan is repaid. Under IFRS 9, ECL allowances are established in Provision for credit losses in the consolidated statement of income immediately after the acquisition date based on classifying each loan in stage 1, since the acquisition date is established as the initial recognition date of purchased performing loans for the purpose of assessing whether a significant increase in credit risk has occurred. Subsequent to the acquisition date, ECL allowances are estimated in a manner consistent with our significant increase in credit risk and impairment policies that we apply to loans that we originate. In contrast, under IAS 39 collective allowances were established after the acquisition date as the purchased loan portfolio turned over and to the extent that the credit quality of the acquired portfolio deteriorated. Under IAS 39, actual individual allowances for credit losses were recorded as they arose subsequent to the acquisition date in a manner that was consistent with our IAS 39 impairment policy for loans that we originated. For purchased credit-impaired loans under both IAS 39 and IFRS 9, the acquisition date fair value adjustment on each loan consists of management's estimate of the shortfall of principal and interest cash flows expected to be collected and the time value of money. The time value of money component of the fair value adjustment is amortized to interest income over the expected remaining life of the loan using the effective interest rate method. Subsequent to the acquisition date, we regularly re-estimate the expected cash flows for purchased credit-impaired loans. Decreases in the expected cash flows will CIBC 2019 ANNUAL REPORT 113 --- result in an increase in our allowances under IFRS 9, which is consistent with the previous IAS 39 requirements. Increases in the expected cash flows will result in a recovery of the ECL allowance under IFRS 9. Under IAS 39, increases in the expected cash flows resulted in a recovery of provision for credit losses and a reduction in our allowance for credit losses, or if no allowance existed, an increase in interest income. ECL allowances for purchased credit-impaired loans are reported in stage 3. ### Originated credit impaired financial assets The accounting for originated credit-impaired financial assets operates in a similar manner to the accounting for purchased credit-impaired loans in that originated credit-impaired assets are initially recognized at fair value with no initial expected credit loss allowance as concerns about the collection of future cash flows is instead reflected in the origination date discount. The time value of money component of the discount is amortized to interest income over the expected remaining life of the financial asset using the effective interest rate method. Changes in expectation regarding the contractual cash flows for loans are recognized immediately in provision for credit losses and for securities are recognized in Gains (losses) from debt securities measured at FVOCI and amortized cost, net. This accounting generally applies to financial assets that result from debt restructuring arrangements in which a previously impaired financial asset is exchanged for a new financial asset that is either recognized at a fair value that represents a deep discount to par or for which there are significant concerns over the ability to collect the contractual cash flows. ### Other significant accounting policies related to the accounting for financial instruments following the application of IFRS 9 are as follows: #### Determination of fair value The transition to IFRS 9 did not impact the definition of fair value, which continues to be defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based upon the market observability of the valuation inputs used in measuring the fair value. See Note 2 for more details about fair value measurement subsequent to initial recognition by type of financial instrument. #### Transaction costs Transaction costs relating to financial instruments mandatorily measured or designated at FVTPL are expensed as incurred under IFRS 9, consistent with the accounting for transaction costs related to trading and FVO instruments under IAS 39. Transaction costs are amortized over the expected life of the instrument using the effective interest rate method for instruments measured at amortized cost under both IFRS 9 and IAS 39, and debt instruments measured at FVOCI under IFRS 9 and as AFS under IAS 39. For equity instruments designated at FVOCI under IFRS 9 and for equity instruments accounted for at AFS under IAS 39, transaction costs are included in the instrument's carrying value. #### Date of recognition of securities Under IFRS 9, we continue to account for all securities on our consolidated balance sheet using settlement date accounting, consistent with our accounting under IAS 39. #### Effective interest rate Under IFRS 9, interest income and expense for all financial instruments measured at amortized cost and for debt securities measured at FVOCI is recognized in Interest income and Interest expense using the effective interest rate method, which is similar to the requirements under IAS 39 for loans and receivables and AFS debt securities. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument to the net carrying value of the financial asset or liability upon initial recognition. When calculating the effective interest rate, we estimate future cash flows considering all contractual terms of the financial instrument, but not future credit losses. Fees relating to loan origination, including commitment, restructuring and renegotiation fees, are considered an integral part of the yield earned on the loan and are accounted for using the effective interest rate method. Fees received for commitments that are not expected to result in a loan are included in Non-interest income over the commitment period. Loan syndication fees are included in Non-interest income on completion of the syndication arrangement, provided that the yield on the portion of the loan we retain is at least equal to the average yield earned by the other lenders involved in the financing; otherwise, an appropriate portion of the fee is deferred as unearned income and amortized to interest income using the effective interest rate method. Under IFRS 9, interest income is recognized on stage 1 and stage 2 financial assets measured at amortized cost by applying the effective interest rate to the gross carrying amount of the financial instrument. For stage 3 financial instruments, interest income is recognized using the rate of interest used to discount the estimated future cash flows for the purpose of measuring the impairment loss and applied to the net carrying value of the financial instrument, which is similar to the methodology under IAS 39 applied to impaired loans. #### Securitizations and derecognition of financial assets Securitization of our own assets provides us with an additional source of liquidity. As we generally retain substantially all of the risks and rewards of the transferred assets, assets remain on the consolidated balance sheet and funding from these transactions is accounted for as Deposits - secured borrowing transactions. Under both IAS 39 and IFRS 9, securitizations to non-consolidated SEs are accounted for as sales, with the related assets being derecognized, only where: * Our contractual right to receive cash flows from the assets has expired; * We transfer our contractual rights to receive the cash flows of the financial asset, and have: (i) transferred substantially all the risks and rewards of ownership, or (ii) neither retained nor transferred substantially all the risks and rewards, but have not retained control; or * The transfer meets the criteria of a qualifying pass-through arrangement. #### Derecognition of financial liabilities Under both IFRS 9 and IAS 39, a financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. If an existing financial liability is replaced by another liability from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying values is recognized in the consolidated statement of income. The repurchase of a debt instrument is considered an extinguishment of that debt instrument even if we intend to resell the instrument in the near term. 114 CIBC 2019 ANNUAL REPORT --- #### Financial guarantees Financial guarantees are financial contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Under both IAS 39 and IFRS 9, financial guarantee contracts issued by CIBC that are not classified as insurance contracts are initially recognized as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantees, which is generally the premium received or receivable on the date the guarantee was given. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortization, and the applicable allowance. Under IFRS 9 the allowance is calculated using the ECL methodology, while under IAS 39 the allowance, if any, represented the present value of any expected payment when a payment under the guarantee had become probable. A financial guarantee that qualifies as a derivative is remeasured at fair value as at each reporting date and reported as Derivative instruments in assets or liabilities, as appropriate. #### Mortgage commitments Mortgage interest rate commitments are extended to our retail clients in contemplation of borrowing to finance the purchase of homes under mortgages to be funded by CIBC in the future. These commitments are usually for periods of up to 120 days and generally entitle the borrower to receive funding at the lower of the interest rate at the time of the commitment and the rate applicable at the funding date. We use financial instruments, such as interest rate derivatives, to economically hedge our exposure to an increase in interest rates. Based on our estimate of the commitments expected to be exercised, a financial liability would be recognized on our consolidated balance sheet, to which we apply the FVO. We also carry the associated economic hedges at fair value on the consolidated balance sheet. Changes in the fair value of the FVO commitment liability and the associated economic hedges are included in gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9 and FVO gains (losses), net under IAS 39. In addition, since the fair value of the commitments is priced into the mortgage, the difference between the mortgage amount and its fair value at funding is recognized in the consolidated statement of income to offset the carrying value of the mortgage commitment that is released upon its expiry. #### Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset, and the amount presented net, when we have a legally enforceable right to set off the recognized amounts and intend to settle on a net basis or to realize the asset and settle the liability simultaneously. #### Acceptances and customers' liability under acceptances Acceptances constitute a liability of CIBC on negotiable instruments issued to third parties by our customers. We earn a fee for guaranteeing and then making the payment to the third parties. The amounts owed to us by our customers in respect of these guaranteed amounts are reflected in assets as Customers' liability under acceptances. #### Securities purchased under resale agreements and obligations related to securities sold under repurchase agreements Securities purchased under resale agreements are treated as collateralized lending transactions as they represent the purchase of securities affected with a simultaneous agreement to sell them back at a future date at a fixed price, which is generally near term. These transactions are classified and measured at amortized cost under IFRS 9, as they meet the SPPI criteria and are managed under a hold to collect business model. Under IAS 39, they were also generally accounted for at amortized cost unless they were designated under the FVO. Under IFRS 9, an ECL is applied to these instruments, while under IAS 39 an allowance was only provided to the extent there was an impairment. Under both IFRS 9 and IAS 39, interest income is accrued using the effective interest rate method and is included in Interest income - Securities borrowed or purchased under resale agreements in the consolidated statement of income. Similarly, securities sold under agreements to repurchase are treated as collateralized borrowing transactions with interest expense accrued using the effective interest rate method and are included in Interest expense - Securities lent or sold under repurchase agreements in the consolidated statement of income. #### Cash collateral on securities borrowed and securities lent The right to receive back cash collateral paid and the obligation to return cash collateral received on borrowing and lending of securities, which is generally near term, is recognized as cash collateral on securities borrowed and securities lent, respectively. These transactions are classified and measured at amortized cost as they meet the SPPI criteria and are managed under a hold to collect business model. Under IFRS 9, an ECL is applied to these instruments, while under IAS 39 an allowance was only provided to the extent there was an impairment. Interest income on cash collateral paid and interest expense on cash collateral received together with the security borrowing fees and security lending income are included in Interest income - Securities borrowed or purchased under resale agreements and Interest expense - Securities lent or sold under repurchase agreements, respectively. For securities borrowing and lending transactions where securities are pledged or received as collateral, securities pledged by CIBC remain on the consolidated balance sheet and securities received by CIBC are not recognized on the consolidated balance sheet. #### Derivatives We use derivative instruments for both asset/liability management (ALM) and trading purposes. The derivatives used for ALM purposes allow us to manage financial risks, such as movements in interest and foreign exchange rates, while our derivative trading activities are primarily driven by client trading activities. We may also take proprietary trading positions with the objective of earning income. Under both IAS 39 and IFRS 9, all derivative instruments are recognized initially, and are measured subsequently, at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value, in both cases as derivative instruments. Any realized and unrealized gains or losses on derivatives used for trading purposes were recognized immediately in Trading income (loss) under IAS 39 and are recognized in Gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9. The accounting for derivatives used for ALM purposes depends on whether they qualify for hedge accounting as discussed below. Fair values of exchange-traded derivatives are based on quoted market prices. Fair values of over-the-counter (OTC) derivatives, including OTC derivatives that are centrally cleared, are obtained using valuation techniques, including discounted cash flow models and option pricing models. See Note 12 for further information on the valuation of derivatives. #### Derivatives used for ALM purposes that qualify for hedge accounting As permitted under IFRS 9, we have elected to continue to apply the hedge accounting requirements of IAS 39. However, in 2018, we adopted the new hedge accounting disclosure requirements under the amendments to IFRS 7 "Financial Instruments: Disclosures." Details of the additional disclosures are provided in Note 13. We apply hedge accounting for derivatives held for ALM purposes that meet specified criteria. There are three types of hedges: fair value, cash flow and hedges of net investments in foreign operations (NIFOs). When hedge accounting is not applied, the change in the fair value of the derivative is recognized in the consolidated statement of income (see "Derivatives used for ALM purposes that are not designated for hedge accounting" below). In order for derivatives to qualify for hedge accounting, the hedge relationship must be designated and formally documented at its inception in accordance with IAS 39. The particular risk management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how hedge effectiveness is assessed, are documented. Hedge effectiveness requires a high correlation of changes in fair values or cash flows between the hedged and hedging items. We assess the effectiveness of derivatives in hedging relationships, both at inception and on an ongoing basis. Ineffectiveness results to the extent that the change in the fair value of the hedging derivative differs from the change in the fair value of the hedged risk in the hedged item, or the cumulative change in the fair value of the hedging derivative exceeds the cumulative change in the fair value of expected future cash flows of the hedged item. The amount of ineffectiveness of hedging instruments is recognized immediately in the consolidated statement of income. ##### Fair value hedges We designate fair value hedges primarily as part of interest rate risk management strategies that use derivatives to hedge changes in the fair value of financial instruments with fixed interest rates. Changes in fair value attributed to the hedged interest rate risk are accounted for as basis adjustments to the hedged financial instruments and are included in Net interest income. Changes in fair value from the hedging derivatives are also included in Net interest income. Any differences between the two represent hedge ineffectiveness that is included in Net interest income. Similarly, for hedges of foreign exchange risk, changes in the fair value from the hedging derivatives and non-derivatives are included in FXOTT. Changes in the fair value of the hedged item from the hedged foreign exchange risk are accounted for as basis adjustments and are also included in FXOTT. Any difference between the two represents hedge ineffectiveness. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated and the basis adjustment applied to the hedged item is amortized over the remaining term of the hedged item. If the hedged item is derecognized, the unamortized basis adjustment is recognized immediately in the consolidated statement of income. ##### Cash flow hedges We designate cash flow hedges as part of interest rate risk management strategies that use derivatives to mitigate our risk from variable cash flows by effectively converting certain variable-rate financial instruments to fixed-rate financial instruments, and as part of foreign exchange rate risk management strategies to hedge forecasted foreign currency denominated cash flows. We also designate cash flow hedges to hedge changes in CIBC's share price in respect of certain cash-settled share-based payment awards. The effective portion of the change in fair value of the derivative instrument is recognized in OCI until the variability in cash flows being hedged is recognized in the consolidated statement of income in future accounting periods, at which time an appropriate portion of the amount that was in AOCI is reclassified into the consolidated statement of income. The ineffective portion of the change in fair value of the hedging derivative is included in Net interest income, FXOTT, or Non-interest expenses immediately as it arises. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. Upon termination of the hedge relationship, any remaining amount in AOCI remains therein until it is recognized in the consolidated statement of income when the variability in cash flows hedged or the hedged forecast transaction is ultimately recognized in the consolidated statement of income. When the forecasted transaction is no longer expected to occur, the related cumulative gain or loss in AOCI is recognized immediately in the consolidated statement of income. ##### Hedges of NIFOs with a functional currency other than the Canadian dollar We may designate NIFO hedges to mitigate the foreign exchange risk on our NIFOs with a functional currency other than the Canadian dollar. These hedges are accounted for in a similar manner to cash flow hedges. The change in fair value of the hedging instrument relating to the effective portion is recognized in OCI. The change in fair value of the hedging instrument attributable to the forward points and relating to the ineffective portion are recognized immediately in FXOTT. Gains and losses in AOCI are reclassified to the consolidated statement of income upon the disposal or partial disposal of the investment in the foreign operation that involves the loss of control, as explained in the "Foreign currency translation" policy above. #### Derivatives used for ALM purposes that are not designated for hedge accounting The change in fair value of the derivatives not designated as accounting hedges but used to economically hedge FVO assets or liabilities was included in FVO gains (losses), net under IAS 39 and Gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9. The change in fair value of other derivatives not designated as accounting hedges but used for other economic hedging purposes is included in FXOTT, Non-interest income, or in the case of economic hedges of cash-settled share-based payment obligations, in compensation expense, as appropriate. #### Embedded derivatives Under both IAS 39 and IFRS 9, derivatives embedded in financial liabilities are accounted for as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument and the terms of the embedded derivative represent those of a freestanding derivative in situations where the combined instrument is not classified as FVTPL or designated as FVTPL using the FVO. These embedded derivatives, which are classified together with the host instrument on the consolidated balance sheet, are measured at fair value, with changes therein included in the consolidated statement of income. The residual amount of the host liability is accreted to its maturity value through Interest income and Interest expense, respectively, using the effective interest rate method. Gains at inception on derivatives embedded in financial instruments bifurcated for accounting purposes are not recognized at inception; instead they are recognized over the life of the residual host instrument. Where an embedded derivative is separable from the host instrument but the fair value, as at the acquisition or reporting date, cannot be reliably measured separately or is otherwise not bifurcated, the entire combined contract is measured at FVTPL. Under IFRS 9, embedded derivatives are no longer bifurcated from financial assets as was the case under IAS 39. Instead the financial asset is classified in its entirety into the appropriate classification at initial recognition through an assessment of the contractual cash flow characteristics of the asset and the business model under which it is managed. #### Accumulated other comprehensive income AOCI is included on the consolidated balance sheet as a separate component of total equity, net of income tax. It includes net unrealized gains and losses on FVOCI debt and equity securities under IFRS 9 (AFS under IAS 39), the effective portion of gains and losses on derivative instruments designated within effective cash flow hedges, unrealized foreign currency translation gains and losses on foreign operations with a functional currency other than the Canadian dollar net of gains or losses on related hedges, net gains (losses) related to fair value changes of FVO liabilities attributable to changes in own credit risk, and net gains (losses) on post-employment defined benefit plans. #### Treasury shares Where we repurchase our own equity instruments, these instruments are treated as treasury shares and are deducted from equity at their cost with any gain or loss recognized in Contributed surplus or Retained earnings as appropriate. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issue or cancellation of our own equity instruments. Any difference between the carrying value and the consideration, if reissued, is also included in Contributed surplus. #### Liabilities and equity We classify financial instruments as a liability or equity based on the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities at potentially unfavourable terms. A contract is also classified as a liability if it is a non-derivative and could obligate us to deliver a variable number of our own shares or it is a derivative other than one that can be settled by the delivery of a fixed amount of cash or another financial asset for a fixed number of our own equity instruments. An instrument is classified as equity if it evidences a residual interest in our assets after deducting all liabilities. The components of a compound financial instrument are classified and accounted for separately as assets, liabilities, or equity as appropriate. Incremental costs directly attributable to the issuance of equity instruments are shown in equity, net of income tax. #### Land, buildings and equipment Land is recognized initially at cost and is subsequently measured at cost less any accumulated impairment losses. Buildings, furniture, equipment and leasehold improvements are recognized initially at cost and are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Depreciation commences when the assets are available for use and is recognized on a straight-line basis to depreciate the cost of these assets to their estimated residual value over their estimated useful lives. The estimated useful lives are as follows: * Buildings - 40 years * Computer equipment - 3 to 7 years * Office furniture and other equipment - 4 to 15 years * Leasehold improvements – over the estimated useful life Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and are adjusted if appropriate. Gains and losses on disposal are included in Non-interest income - Other. We consider a portion of land and a building underlying a finance lease arrangement as investment property since we sub-lease this portion to third parties. Our investment property is recognized initially at cost and is subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Our investment property is depreciated on a straight-line basis over its estimated useful life, being the term of the lease. Rental income is included in Non-interest income - Other. #### Goodwill, software and other intangible assets Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets, liabilities and contingent liabilities acquired in business combinations. Identifiable intangible assets are recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and have fair values that can be reliably measured. Goodwill is not amortized, but is subject to impairment review at least annually or more frequently if there are indicators that the goodwill may be impaired. Refer to the "Impairment of non-financial assets" policy below. Intangible assets represent software and customer relationships, core deposit intangibles, investment management contracts, and brand names recognized as part of past acquisitions. Intangible assets with definite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Each intangible asset is assessed for legal, regulatory, contractual, competitive or other factors to determine if the useful life is definite. Intangible assets with definite useful lives are amortized over their estimated useful lives, which are as follows: * Software - 5 to 10 years * Contract-based intangibles - 8 to 15 years * Core deposit and customer relationship intangibles – 3 to 16 years Intangible assets with indefinite useful lives are measured at cost less any accumulated impairment losses. Indefinite-life intangible assets are tested for impairment at least annually and whenever there is an indication that the asset may be impaired. Refer to the "Impairment of non-financial assets" policy below. #### Impairment of non-financial assets The carrying values of non-financial assets with definite useful lives, including buildings and equipment, investment property, and intangible assets with definite useful lives are reviewed to determine whether there is any indication of impairment. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. If any such indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. For the purpose of reviewing non-financial assets with definite useful lives for impairment, asset groups are reviewed at their lowest level for which identifiable cash inflows are largely independent of cash inflows of other assets or groups of assets. This grouping is referred to as a cash-generating unit (CGU). Corporate assets do not generate separate cash inflows. Corporate assets are tested for impairment at the minimum collection of CGUs to which the corporate asset can be allocated reasonably and consistently. The recoverable amount is the greater of fair value less costs to sell and value in use. Value in use is the present value of the future cash flows expected to be derived from the asset or CGU. When the carrying value exceeds its recoverable amount, an impairment loss equal to the difference between the two amounts is recognized in the consolidated statement of income. If an impairment subsequently reverses, the carrying value of the asset is increased to the extent that the carrying value of the underlying assets does not exceed the carrying value that would have been determined, net of CIBC 2019 ANNUAL REPORT 117 --- depreciation or amortization, if no impairment had been recognized. Any impairment reversal is recognized in the consolidated statement of income in the period in which it occurs. Goodwill is assessed for impairment based on the group of CGUs expected to benefit from the synergies of the business combination, and the lowest level at which management monitors the goodwill. Any potential goodwill impairment is identified by comparing the recoverable amount of the CGU grouping to which the goodwill is allocated to its carrying value including the allocated goodwill. If the recoverable amount is less than its carrying value, an impairment loss is recognized in the consolidated statement of income in the period in which it occurs. Impairment losses on goodwill are not subsequently reversed if conditions change. #### Income taxes Income tax comprises current tax and deferred tax. Income tax is recognized in the consolidated statement of income, except to the extent that it relates to items recognized in OCI or directly in equity, in which case it is recognized accordingly. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted as at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when CIBC intends to settle on a net basis and the legal right to offset exists. Deferred tax is recognized on temporary differences between the carrying value of assets and liabilities on the consolidated balance sheet and the corresponding amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences unless the temporary differences relate to our NIFOs and will not reverse in the foreseeable future. Deferred tax assets, other than those arising from our NIFOs, are recognized to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilized. Deferred tax assets arising from our NIFOs are recognized for deductible temporary differences which are expected to reverse in the foreseeable future to the extent that it is probable that future taxable profits will be available against which these deductible temporary differences can be utilized. Deferred tax is not recognized for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income, or for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted as at the reporting date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity or tax reporting group. We are subject to income tax laws in the various jurisdictions where we operate, and the tax laws in those jurisdictions are potentially subject to different interpretations by us and the relevant taxation authority, which gives rise to uncertainty. For tax positions where there is uncertainty regarding the ultimate determination of the tax impact, including positions which are under audit, dispute or appeal, we recognize provisions to consider this uncertainty based on our best estimate of the amount expected to be paid based on an assessment of the relevant factors. #### Pension and other post-employment benefits We are the sponsor of a number of employee benefit plans. These plans include both defined benefit and defined contribution pension plans, and various other post-employment benefit plans including post-retirement medical and dental benefits. ##### Defined benefit plans The cost of pensions and other post-employment benefits earned by employees is actuarially determined separately for each plan using the projected unit credit method and our best estimate of salary escalation, retirement ages of employees, mortality and expected health-care costs. This represents CIBC's defined benefit obligation, which is measured as at the reporting date. The discount rate used to measure the defined benefit obligation is based on the yield of a portfolio of high-quality corporate bonds denominated in the same currency in which the benefits are expected to be paid and with terms to maturity that, on average, match the terms of the defined benefit obligation. Plan assets are measured at fair value as at the reporting date. The net defined benefit asset (liability) represents the present value of the defined benefit obligation less the fair value of plan assets. The net defined benefit asset (liability) is included in Other assets and Other liabilities, respectively. Current service cost reflects the cost of providing post-employment benefits earned by employees in the current period. Current service cost is calculated as the present value of the benefits attributed to the current year of service and is recognized in the consolidated statement of income. The current service cost is calculated using a separate discount rate to reflect the longer duration of future benefit payments associated with the additional year of service to be earned by the plan's active participants. Past service costs arising from plan amendments or curtailments are recognized in net income in the period in which they arise. Net interest income or expense comprises interest income on plan assets and interest expense on the defined benefit obligation. Interest income is calculated by applying the discount rate to the plan assets, and interest expense is calculated by applying the discount rate to the defined benefit obligation. Net interest income or expense is recognized in the consolidated statement of income. Actuarial gains and losses represent changes in the present value of the defined benefit obligation which result from changes in actuarial assumptions and differences between previous actuarial assumptions and actual experience, and from differences between the actual return on plan assets and assumed interest income on plan assets. Net actuarial gains and losses are recognized in OCI in the period in which they arise and are not subject to subsequent reclassification to net income. Cumulative net actuarial gains and losses are included in AOCI. When the calculation results in a net defined benefit asset, the recognized asset is limited to the present value of economic benefits available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset ceiling). For plans where we do not have an unconditional right to a refund of surplus, we determine the asset ceiling by reference to future economic benefits available in the form of reductions in future contributions to the plan, in which case the present value of economic benefits is calculated giving consideration to minimum funding requirements for future service that apply to the plan. Where a reduction in future contributions to the plan is not currently realizable at the reporting date, we estimate whether we will have the ability to reduce contributions for future service at some point during the life of the plan by taking into account, among other things, expected future returns on plan assets. If it is anticipated that we will not be able to recover the value of the net defined benefit asset, after considering minimum funding requirements for future service, the net defined benefit asset is reduced to the amount of the asset ceiling. When the payment in the future of minimum funding requirements related to past service would result in a net defined benefit surplus, or an increase in a net defined benefit surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available as a refund or a reduction in future contributions. Any funded status surplus is limited to the present value of future economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. 118 CIBC 2019 ANNUAL REPORT --- #### Defined contribution plans Costs for defined contribution plans are recognized during the year in which the service is provided. #### Other long-term employee benefits CIBC sponsors a closed long-term disability plan that is classified as a long-term defined benefit arrangement. As the amount of the long-term disability benefit does not depend on the length of service, the obligation is recognized when an event occurs that gives rise to an obligation to make payments. CIBC also offers other medical and dental benefits to employees while on long-term disability. The amount of other long-term employee benefits is actuarially calculated using the projected unit credit method. Under this method, the benefit is discounted to determine its present value. The methodology used to determine the discount rate used to value the long-term employee benefit obligation is consistent with that for pension and other post-employment benefit plans. Actuarial gains and losses and past service costs are recognized in the consolidated statement of income in the period in which they arise. #### Share-based payments We provide compensation to certain employees and directors in the form of share-based awards. Compensation expense for share-based awards is recognized from the service commencement date to the earlier of the contractual vesting date or the employee's retirement eligible date. For grants regularly awarded in the annual incentive compensation cycle (annual incentive grant), the service commencement date is considered to be the start of the fiscal year that precedes the fiscal year in which the grant is made. The service commencement date in respect of special awards granted outside of the annual cycle is the grant date. The amount of compensation expense recognized is based on management's best estimate of the number of share-based awards expected to vest, including estimates of expected forfeitures, which are revised periodically as appropriate. For the annual incentive grant, compensation expense is recognized from the service commencement date based on the estimated fair value of the forthcoming grant with the estimated fair value adjusted to the actual fair value at the grant date. Under the Restricted Share Award (RSA) plan, where grants are settled in the cash equivalent of common shares, changes in the obligation which arise from fluctuations in the market price of common shares, net of related hedges, are recognized in the consolidated statement of income as compensation expense in proportion to the award recognized. Under the Restricted Stock plan, where restricted stock is granted and settled in common shares, compensation expense is based on the grant date fair value. Compensation expense results in a corresponding increase to contributed surplus. When the restricted stock vests and is released from restriction, the amount recognized in Contributed surplus is credited to common share capital. Under the Performance Share Unit (PSU) plan, where grants are settled in the cash equivalent of common shares, changes in the obligation which arise from fluctuations in the market price of common shares, and revised estimates of the performance factor, net of related hedges, are recognized in the consolidated statement of income as compensation expense in proportion to the award recognized. The performance factor ranges from 75% to 125% of the initial number of units awarded based on CIBC's performance relative to the other major Canadian banks. Compensation expense in respect of the Employee Stock Option Plan (ESOP) is based on the grant date fair value. Where the service commencement date precedes the grant date, compensation expense is recognized from the service commencement date based on the estimated fair value of the award at the grant date, with the estimated fair value adjusted to the actual fair value at the grant date. Compensation expense results in a corresponding increase to contributed surplus. If the ESOP award is exercised, the proceeds we receive, together with the amount recognized in Contributed surplus, are credited to common share capital. If the ESOP award expires unexercised, the compensation expense remains in Contributed surplus. As part of our acquisition of Wellington Financial Fund V LP (Wellington Financial) in the first quarter of 2018, equity-settled awards in the form of exchangeable shares with specific service and non-market performance vesting conditions were issued to selected employees. Compensation expense in respect of the exchangeable shares is based on the grant date fair value, adjusted for changes in the estimated impact of the non-market performance conditions. Compensation in the form of Deferred Share Units (DSUs) issued pursuant to the Deferred Share Unit Plan, the Deferred Compensation Plan (DCP), and the Directors' Plan, entitle the holder to receive the cash equivalent of a CIBC common share. At the time DSUs are granted, the related expense in respect of the cash compensation that an employee or director would otherwise receive would have been fully recognized. Changes in the obligations which arise from fluctuations in the market price of common shares, net of related hedges, are recognized in the consolidated statement of income as compensation expense for employee DSUs and as Non-interest expense - Other for Directors' DSUS. Our contributions under the Employee Share Purchase Plan (ESPP) are expensed as incurred. The impact due to our changes in common share price in respect of cash-settled share-based compensation under the RSA and PSU plans is hedged through the use of derivatives. We designate these derivatives within cash flow hedge accounting relationships. The effective portion of the change in fair value of these derivatives is recognized in OCI and is reclassified into compensation expense, within the consolidated statement of income, over the period that the hedged awards impact the consolidated statement of income. The ineffective portion of the change in fair value of the hedging derivatives is recognized in the consolidated statement of income immediately as it arises. #### Provisions and contingent liabilities Provisions are liabilities of uncertain timing or amount. A provision is recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The provision is recognized as the best estimate of the amount required to settle the obligation at the reporting date, taking into account the risk and uncertainties related to the obligation. Where material, provisions are discounted to reflect the time value of money, and the increase in the obligation due to the passage of time is presented as Interest expense in the consolidated statement of income. Contingent liabilities are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of CIBC, or are present obligations that have arisen from past events but are not recognized because it is not probable that settlement will require the outflow of economic benefits. Provisions and contingent liabilities are disclosed in the consolidated financial statements. CIBC 2019 ANNUAL REPORT 119 --- ## Earnings per share We present basic and diluted EPS for our common shares. Basic EPS is computed by dividing net income for the period attributable to CIBC common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income for the period attributable to CIBC common shareholders by the weighted-average number of diluted common shares outstanding for the period. Diluted common shares reflect the potential dilutive effect of contingently issuable shares and the exercise of stock options based on the treasury stock method. The number of contingently issuable shares included in diluted EPS is based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period. For stock options, the treasury stock method determines the number of incremental common shares by assuming that outstanding stock options, whose exercise price is less than the average market price of common shares during the period, are exercised and then reduced by the number of common shares assumed to be repurchased with the exercise proceeds from the assumed exercise of the options. Instruments determined to have an antidilutive effect for the period are excluded from the calculation of diluted EPS. ## Fee and commission income CIBC adopted IFRS 15 "Revenue from Contracts with Customers" (IFRS 15) as at November 1, 2018 in place of prior guidance, including IAS 18 "Revenue" (IAS 18) and IFRIC 13 "Customer Loyalty Programmes" (IFRIC 13). We applied IFRS 15 on a modified retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements, which are reported under the prior guidance. The impact of adopting IFRS 15 was not significant (see "Transition impact from adoption of IFRS 15" section below). The new guidance includes a five-step, principles-based recognition and measurement approach, as well as requirements for accounting for contract costs, and enhanced quantitative and qualitative disclosure requirements. The application of this guidance involves the use of judgment. IFRS 15 excludes from its scope revenue related to financial instruments, lease contracts and insurance contracts. As a result, the majority of our revenue was not impacted by the adoption of this standard, including net interest income, net gains (losses) from financial instruments measured/designated at FVTPL and net gains (losses) from debt securities measured at FVOCI. Measurement differences resulting from the adoption of IFRS 15 include the upfront expensing of previously deferred mutual fund sales commissions. In addition, the adoption of IFRS 15 has resulted in the revaluation of our self-managed credit card loyalty points liability, which is now subject to both upward and downward remeasurement to reflect the expected cost of redemption as this expectation changes over time. Previously, under IFRIC 13, decreases in the expected cost of redemptions were only recognized as points were redeemed, while increases were recognized immediately. In addition, the adoption of IFRS 15 has resulted in changes to the presentation of certain revenue and expense items in the consolidated statement of income. Presentation differences include the net presentation of certain expenditures where CIBC is deemed the agent rather than the principal and the gross presentation of certain expenditures where CIBC is deemed the principal rather than the agent. Our prior period comparative consolidated financial statements are reported under the prior guidance, without restatement; however, the measurement and presentation differences in the current period are not significant. Our accounting policies under both IFRS 15 and IAS 18 are provided below. ### Fee and commission income (IAS 18 and IFRIC 13) The recognition of fee and commission income was determined by the purpose of the fee or commission and the basis of accounting for any associated financial instrument. Income earned on completion of a significant act was recognized when the act was completed. Income earned from the provision of services was recognized as revenue as the services were provided. Income which formed an integral part of the effective interest rate of a financial instrument was recognized as an adjustment to the effective interest rate. ### Fee and commission income (IFRS 15) The recognition of fee and commission income is determined by the purpose of the fee or commission and the terms specified in the contract with the customer. Revenue is recognized when, or as, a performance obligation is satisfied by transferring control of the service to the customer, in the amount of the consideration to which we expect to be entitled. Revenue may therefore be recognized at a point in time upon completion of the service or over time as the services are provided. When revenue is recognized over time, we are generally required to provide the services each period, such that control of the services is transferred evenly to the customer, and we therefore measure our progress towards completion of the service based upon the time elapsed. For contracts where the transaction price includes variable consideration, revenue is only recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved, which typically occurs by the end of the reporting period. When another party is involved in providing a service to a customer, we determine whether the nature of our performance obligation is that of a principal or an agent. If we control the service before it is transferred to the customer, we are acting as the principal and present revenue separately from the amount paid to the other party; otherwise we are the agent and present revenue net of the amount paid to the other party. Our performance obligations typically have a term of one year or less, with payment received upon satisfaction of the performance obligation or shortly afterwards, and as a result there is no significant financing component and we do not typically capitalize the costs of obtaining contracts with our customers. Income which forms an integral part of the effective interest rate of a financial instrument continues to be recognized as an adjustment to the effective interest rate. In addition to these general principles, the following specific policies applied under IAS 18 and IFRIC 13 in 2017 and 2018, and IFRS 15 in 2019: Underwriting and advisory fees are earned on debt and equity securities placements and transaction-based advisory services. Under IAS 18 and IFRS 15, underwriting fees are typically recognized at the point in time when the transaction is completed. Under IAS 18 and IFRS 15, advisory fees are generally recognized as revenue over the period of the engagement as the related services are provided or at the point in time when the transaction is completed. Deposit and payment fees arise from personal and business deposit accounts and cash management services. Under IAS 18 and IFRS 15, monthly and annual fees are recognized over the period that the related services are provided. Under IAS 18 and IFRS 15, transactional fees are recognized at the point in time the related services are provided. Credit fees consist of loan syndication fees, loan commitment fees, letter of credit fees, banker's acceptance stamping fees, and securitization fees. Under IAS 18 and IFRS 15, credit fees are generally recognized over the period that the related services are provided, except for loan syndication fees, which are typically recognized at the point in time that the financing placement is completed. Card fees primarily include interchange income, overlimit fees, cash advance fees, and annual fees. Under IAS 18 and IFRS 15, card fees are recognized at the point in time the related services are provided, except for annual fees, which are recognized over the 12-month period to which they relate. Under IFRIC 13 and IFRS 15, the cost of credit card loyalty points is recognized as a reduction of interchange income when the loyalty points are issued for both self-managed and third-party loyalty points programs. Under IFRIC 13, credit card loyalty points for self-managed loyalty programs were 120 CIBC 2019 ANNUAL REPORT --- recognized as deferred revenue when the loyalty points were issued and as revenue when the loyalty points were redeemed. Under IFRS 15, credit card loyalty point liabilities are recognized for self-managed loyalty point programs and are subject to periodic remeasurement to reflect the expected cost of redemption as this expectation changes over time. Commissions on securities transactions include brokerage commissions for transactions executed on behalf of clients, trailer fees and mutual fund sales commissions. Under IAS 18 and IFRS 15, brokerage commissions and mutual fund sales commissions are generally recognized at the point in time that the related transaction is executed. Under IAS 18 and IFRS 15, trailer fees are typically recognized over time based upon the daily net asset value of the mutual fund units held by clients. Investment management fees are primarily based on the respective value of the assets under management (AUM) or assets under administration (AUA) and, under IAS 18 and IFRS 15, are recognized over the period that the related services are provided. Under IAS 18 and IFRS 15, investment management fees relating to our asset management and private wealth management business are generally calculated based on point-in-time AUM balances, and investment management fees relating to our retail brokerage business are generally calculated based on point-in-time AUM or AUA balances. Under IAS 18 and IFRS 15, custodial fees are recognized as revenue over the applicable service period, which is generally the contract term. Mutual fund fees are earned on fund management services and, under IAS 18 and IFRS 15, are recognized over the period that the mutual funds are managed based upon the daily net asset values of the respective mutual funds. In certain circumstances, CIBC may, on a discretionary basis, elect to absorb certain expenses that would otherwise be payable by the mutual funds directly. Under IAS 18 and IFRS 15, these expenses are recognized in Non-interest expenses on the consolidated statement of income. ### Transition impact from adoption of IFRS 15 As indicated above, CIBC adopted IFRS 15 as at November 1, 2018 in place of prior guidance, including IAS 18 and IFRIC 13. We applied IFRS 15 on a modified retrospective basis by recognizing a cumulative \$6 million after-tax credit from the initial application in opening November 1, 2018 retained earnings. The impact of the initial adoption of IFRS 15 related to the upfront expensing of previously deferred mutual fund sales commissions and the revaluation of our self-managed credit card loyalty points liability. CIBC 2019 ANNUAL REPORT 121 --- ## Transition impact from adoption of IFRS 9 As indicated above, CIBC adopted IFRS 9 in place of IAS 39 as of November 1, 2017. As permitted, we did not restate our prior period comparative consolidated financial statements. Amounts reported relating to periods ended on or before October 31, 2017 are reported under IAS 39 and are therefore not comparable to the information presented for 2018 or 2019. Differences in the carrying amounts of financial instruments that resulted from the adoption of IFRS 9, other than from the voluntary adoption of the "own credit" provisions, have been recognized in our opening November 1, 2017 retained earnings and AOCI as if we had always followed the requirements of IFRS 9. The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9, and the impact, net of tax, on shareholders' equity and total equity due to the transition to IFRS 9 on November 1, 2017: | \$ millions, as at Oct. 31, 2017 | IAS 39 carrying amount as at Oct. 31, 2017 | Reclassification upon adoption of IFRS 9 | IFRS 9 carrying amount as at Nov. 1, 2017 | | :--- | ---: | ---: | ---: | | **ASSETS** | | | | | Cash and non-interest-bearing deposits with banks | \$ 3,440 | | \$ 3,440 | | Interest-bearing deposits with banks | 10,712 | | 10,712 | | **Securities** | | | | | Trading and FVO securities | 50,827 | (50,827)$^{\text{(1)}}$ | | | Opening balance | 42,592 | | | | To securities mandatorily measured and designated at FVTPL | | (32,945)$^{\text{(2)}}$ | | | To debt securities measured at FVOCI | | (459)$^{\text{(3)}}$ | | | To equity securities designated at FVOCI | | (1,092)$^{\text{(4)}}$ | | | To securities mandatorily measured at FVTPL | | (8,096)$^{\text{(5)}}$ | | | To securities measured at amortized cost | | 1,092$^{\text{(4)}}$ | | | Closing balance | | 50,827$^{\text{(1)}}$ | 51,931 | | Securities mandatorily measured and designated at FVTPL | | 12$^{\text{(4)}}$ | | | Opening balance | | | | | From AFS securities | | | | | From trading and FVO securities | | | | | From loans | | | | | Closing balance | | | | | Debt securities measured at FVOCI | | | 32,945$^{\text{(2)}}$ | | Opening balance | | | | | From AFS securities | | | | | Closing balance | | | | | Equity securities designated at FVOCI | | | 459$^{\text{(3)}}$ | | Opening balance | | | | | From AFS securities | | | | | Closing balance | | | | | Securities measured at amortized cost | | | 8,110$^{\text{(5)}}$ | | Opening balance | | | | | From AFS and HTM securities | | | | | Closing balance | | | | | Cash collateral on securities borrowed | 93,419 | 26 | | 93,445 | | Securities purchased under resale agreements | 5,035 | | | 5,035 | | Loans | 40,383$^{\text{(6)}}$ | | | 40,383 | | Loans, net of allowance for credit losses | 356,734 | | | 356,734 | | Loans mandatorily measured at FVTPL | | (375)$^{\text{(4)}}$ | | 356,221 | | Other | | 363$^{\text{(4)}}$ | | | | | | (12)$^{\text{(7)}}$ | | | | | | (138)$^{\text{(7)}}$ | | | | Total assets | **\$ 565,264** | **\$ 16** | **\$ (113)** | **\$ 565,167** | | **LIABILITIES AND EQUITY** | | | | | Deposits$^{\text{(8)}}$ | **\$ 439,706** | | | **\$ 439,706** | | Cash collateral on securities lent | 2,024 | | | 2,024 | | Obligations related to securities sold under repurchase agreements | 27,971 | | | 27,971 | | Subordinated indebtedness | 3,209 | | | 3,209 | | Obligations related to securities sold short | 13,713 | | | 13,713 | | Other | 47,404 | | (6) | 47,398 | | Total liabilities | **534,027** | | **(6)** | **534,021** | | **Equity** | | | | | | Preferred shares | 1,797 | | | 1,797 | | Common shares | 12,548 | | | 12,548 | | Contributed surplus | 137 | | | 137 | | Retained earnings | 16,101 | | (148) | 15,957 | | Accumulated other comprehensive income | | | | | | Opening balance | 452 | | | 452 | | Reclassification of AFS debt securities to securities measured at amortized cost | 16 | | | 16 | | Reclassification of AFS equity securities to securities mandatorily measured at FVTPL | | (4) | | | | Recognition of ECL under IFRS 9 on debt securities measured at FVOCI | | | | | | Closing balance | 509 | | | 509 | | Total shareholders' equity | 31,035 | 16 | (103) | 30,948 | | Non-controlling interests | 202 | | (4) | 198 | | Total equity | **31,237** | **16** | **(107)** | **31,146** | | **Total equity** | **\$ 565,264** | **\$ 16** | **\$ (113)** | **\$ 565,167** | $^{\text{(1)}}$ In our structured credit run-off portfolio, certain securities have been reclassified from FVO to securities mandatorily measured at FVTPL. $^{\text{(2)}}$ Certain AFS debt securities have been reclassified to debt securities measured at FVOCI as the securities met the "solely payment of principal and interest" criteria under IFRS 9 and are managed under a "hold to collect and to sell" business model. $^{\text{(3)}}$ Certain securities have been reclassified from AFS to equity securities designated at FVOCI. $^{\text{(4)}}$ Certain asset-backed securities and asset-backed loans have been reclassified from either AFS or loans to securities or loans mandatorily measured at FVTPL. $^{\text{(5)}}$ Certain debt securities have been reclassified from AFS to securities measured at amortized cost as they met the "solely payment of principal and interest" criteria under IFRS 9 and are held within a business model whose objective is to hold assets to collect the contractual cash flows. The fair value of these securities that were still held at October 31, 2018 was \$3,970 million. The change in fair value of these securities that would have been recognized in OCI during the year was a loss of \$35 million had these securities continued to be measured at fair value through OCI. In addition, certain HTM securities that are managed under a "hold to collect" business model were reclassified to securities measured at amortized cost. $^{\text{(6)}}$ Includes \$1,450 million of certain securities purchased under resale agreements that are measured at FVTPL using the FVO under IAS 39 and as mandatorily measured at FVTPL under IFRS 9. $^{\text{(7)}}$ Comprises measurement adjustments of \$69 million related to ECL and \$69 million related to the application of the effective interest rate method recognized upon transition to IFRS 9. $^{\text{(8)}}$ Includes FVO deposits of \$5,947 million under both IAS 39 and IFRS 9. The most significant impact was in respect of the transition from an incurred loss model under IAS 39 to an ECL model under IFRS 9 for the determination of allowances for credit losses. For our business and government portfolios, the individually assessed allowances for impaired instruments recognized under IAS 39 have generally been replaced by stage 3 allowances under IFRS 9, while the collective allowances for performing financial instruments have generally been replaced by either stage 1 or stage 2 allowances under IFRS 9. For our retail portfolios, the portion of our collective allowances that relate to impaired financial instruments under IAS 39 have generally been replaced by stage 3 allowances under IFRS 9, while the performing portion of our collective allowances have generally been replaced by either stage 1 or stage 2 allowances under IFRS 9. 122 CIBC 2019 ANNUAL REPORT --- The following table reconciles the closing allowance for credit losses in accordance with IAS 39 as at October 31, 2017, to the opening ECL allowance determined in accordance with IFRS 9 as at November 1, 2017: | \$ millions, as at | October 31, 2017 | November 1, 2017 | | :--- | ---: | ---: | | | **IAS 39** | **IFRS 9** | | | **Individual allowance** | **Collective allowance** | **Total** | **Remeasurements** | **Stage 1** | **Stage 2** | **Stage 3** | **Total $^{(1)}$** | | **Loans** | | | | | | | | | | Residential mortgages | \$ 2 | \$ 201 | \$ 203 | \$ 19 | \$ 28 | \$ 43 | \$ 131 | \$ 202 | | Personal | 7 | 488 | 495 | (19) | 164 | 110 | 476 | | Credit card | | 386 | 386 | 128 | 101 | 413 | 514 | | Business and government | 183 | 470 | 653 | (65) | 234 | 150 | 204 | 588 | | | \$ 192 | \$ 1,545 | \$ 1,737 | \$ 63 | \$ 527 | \$ 808 | \$ 465 | \$ 1,800 | | **Comprises:** | | | | | | | | | | Loans | \$ 192 | \$ 1,426 | \$ 1,618 | \$ 69 | \$ 474 | \$ 748 | \$ 465 | \$ 1,687 | | Undrawn credit facilities and other off-balance sheet exposures $^{(2)}$ | | 119 | 119 | (6) | 53 | | 60 | 113 | | **Securities** | | | | | | | | | | Debt securities measured at FVOCI $^{(3)}$ | n/a | n/a | n/a | \$ 49 | \$ 14 | \$ 35 | \$ | \$ 49 | $^{(1)}$ In addition, ECL allowances for other financial assets classified as amortized cost were immaterial as at November 1, 2017. $^{(2)}$ Included in other liabilities on the consolidated balance sheet. $^{(3)}$ The ECL allowances for debt securities measured at FVOCI are recognized in AOCI and do not affect the carrying value on our consolidated balance sheet, as these securities are measured at fair value. n/a Not applicable under IAS 39. --- ## Note 2 Fair value measurement This note presents the fair values of financial instruments and explains how we determine those values. Note 1, "Basis of preparation and summary of significant accounting policies" sets out the accounting treatment for each measurement category of financial instruments. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). The determination of fair value requires judgment and is based on market information, where available and appropriate. Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based on the valuation inputs used in measuring the fair value, as outlined below. * Level 1 - Unadjusted quoted market prices in active markets for identical assets or liabilities we can access at the measurement date. Bid prices, ask prices or prices within the bid and ask, which are the most representative of the fair value, are used as appropriate to measure fair value. Fair value is best evidenced by an independent quoted market price for the same instrument in an active market. An active market is one where transactions are occurring with sufficient frequency and volume to provide quoted prices on an ongoing basis. * Level 2 - Quoted prices for identical assets or liabilities in markets that are inactive or observable market quotes for similar instruments, or use of valuation techniques where all significant inputs are observable. Inactive markets may be characterized by a significant decline in the volume and level of observed trading activity or through large or erratic bid/offer spreads. In instances where traded markets do not exist or are not considered sufficiently active, we measure fair value using valuation models. * Level 3 - Non-observable or indicative prices or use of valuation techniques where one or more significant inputs are non-observable. For a significant portion of our financial instruments, quoted market prices are not available because of the lack of traded markets, and even where such markets do exist, they may not be considered sufficiently active to be used as a final determinant of fair value. When quoted market prices in active markets are not available, we would consider using valuation models. The valuation model and technique we select maximizes the use of observable market inputs to the extent possible and appropriate in order to estimate the price at which an orderly transaction would take place at the measurement date. In an inactive market, we consider all reasonably available information, including any available pricing for similar instruments, recent arm's-length market transactions, any relevant observable market inputs, indicative dealer or broker quotations, and our own internal model-based estimates. Valuation adjustments are an integral component of our fair valuation process. We apply judgment in establishing valuation adjustments that take into account various factors that may have an impact on the valuation. Such factors include, but are not limited to, the bid-offer spread, illiquidity due to lack of market depth, parameter uncertainty and other market risk, model risk and credit risk. Generally, the unit of account for a financial instrument is the individual instrument, and valuation adjustments are applied at an individual instrument level, consistent with that unit of account. In cases where we manage a group of financial assets and liabilities that consist of substantially similar and offsetting risk exposures, the fair value of the group of financial assets and liabilities is measured on the basis of the net open risks. We apply judgment in determining the most appropriate inputs and the weighting we ascribe to each such input as well as in our selection of valuation methodologies. Regardless of the valuation technique we use, we incorporate assumptions that we believe market participants would make for credit, funding, and liquidity considerations. When the fair value of a financial instrument at inception is determined using a valuation technique that incorporates significant non-observable market inputs, no inception profit or loss (the difference between the determined fair value and the transaction price) is recognized at the time the asset or liability is first recorded. Any gains or losses at inception are deferred and recognized only in future periods over the term of the instruments or when market quotes or data become observable. We have an ongoing process for evaluating and enhancing our valuation techniques and models. Where enhancements are made, they are applied prospectively, so that fair values reported in prior periods are not recalculated on the new basis. Valuation models used, including analytics for the construction of yield curves and volatility surfaces, are vetted and approved, consistent with our model risk policy. To ensure that valuations are appropriate, we have established internal guidance on fair value measurement, which is reviewed periodically in recognition of the dynamic nature of markets and the constantly evolving pricing practices in the market. A number of policies and controls are put in place to ensure that the internal guidance on fair value measurement is being applied consistently and appropriately, including independent validation of valuation inputs to external sources such as exchange quotes, broker quotes or other management-approved independent pricing sources. Key model inputs, such as yield curves and volatilities, are independently verified. The results from the independent price validation and any valuation adjustments are reviewed by the Independent Price Verification Committee on a monthly basis. This includes, but is not limited to, reviewing fair value adjustments and methodologies, independent price verification results, limits and valuation uncertainty. Due to the judgment used in applying a wide variety of acceptable valuation techniques and models, as well as the use of estimates inherent in this process, estimates of fair value for the same or similar assets may differ among financial institutions. The calculation of fair value is based on market conditions as at each consolidated balance sheet date, and may not be reflective of ultimate realizable value. CIBC 2019 ANNUAL REPORT 123 --- Methods and assumptions #### Financial instruments with fair value equal to carrying value For financial instruments that are not carried on the consolidated balance sheet at fair value and where we consider the carrying value to be a reasonable approximation of fair value due to their short-term nature and generally negligible credit risk, the fair values disclosed for these financial instruments are assumed to equal their carrying values. These financial instruments are: cash and non-interest-bearing deposits with banks; short-term interest-bearing deposits with banks; cash collateral on securities borrowed; securities purchased under resale agreements; customers' liability under acceptances; cash collateral on securities lent; obligations related to securities sold under repurchase agreements; acceptances; deposits with demand features; and certain other financial assets and liabilities. #### Securities The fair value of debt or equity securities and obligations related to securities sold short is based on quoted bid or ask market prices where available in an active market. Securities for which quotes in an active market are not available are valued using all reasonably available market information as described below. The fair value of government issued or guaranteed securities that are not traded in an active market is calculated by applying valuation techniques such as discounted cash flow models using implied yields derived from the prices of actively traded government securities and most recently observable spread differentials. The fair value of corporate debt securities is determined using the most recently executed transaction prices, and where appropriate, adjusted to the price of these securities obtained from independent dealers, brokers, and third-party multi-contributor consensus pricing sources. When observable price quotations are not available, fair value is determined based on discounted cash flow models using observable discounting curves such as benchmark and government yield curves and spread differentials observed through independent dealers, brokers, and third-party multi-contributor consensus pricing sources. Asset-backed securities (ABS) and mortgage-backed securities (MBS) not issued or guaranteed by a government are valued using discounted cash flow models making maximum use of market observable inputs, such as broker quotes on identical or similar securities and other pricing information obtained from third-party pricing sources adjusted for the characteristics and the performance of the underlying collateral. Other key inputs used include prepayment and liquidation rates, credit spreads, and discount rates commensurate with the risks involved. These assumptions factor information that is derived from actual transactions, underlying reference asset performance, external market research, and market indices, where appropriate. Privately issued debt and equity securities, which include certain Community Reinvestment Act equity investments and Federal Home Loan Bank (FHLB) stock, are valued using recent market transactions, where available. Otherwise, fair values are derived from valuation models using a market or income approach. These models consider various factors, including projected cash flows, earnings, revenue or other third-party evidence as available. The fair value of limited partnership investments is based upon net asset values published by third-party fund managers and is adjusted for more recent information, where available and appropriate. The carrying value of Community Reinvestment Act equity investments and FHLB stock approximates fair value. #### Loans The fair value of variable-rate loans and loans for which interest rates are repriced or reset frequently is assumed to be equal to their carrying value. The fair value for fixed-rate loans is estimated using a discounted cash flow calculation that uses market interest rates. The ultimate fair value of loans disclosed is net of the associated allowance for credit losses. The fair value of loans is not adjusted for the value of any credit derivatives used to manage the credit risk associated with them. The fair value of these credit derivatives is disclosed separately. #### Other assets and other liabilities Other assets and other liabilities mainly comprise accrued interest receivable or payable, brokers' client accounts receivable or payable, precious metals and accounts receivable or payable. The fair values of other assets and other liabilities are primarily assumed to be at cost or amortized cost as we consider the carrying value to be a reasonable approximation of fair value, except for the fair value of precious metals, which is quoted in an active market. Other assets also include investment in bank-owned life insurance carried at the cash surrender value, which is assumed to be a reasonable approximation of fair value. #### Deposits The fair values of floating-rate deposits and demand deposits are assumed to be equal to their amortized cost. The fair value of fixed-rate deposits is determined by discounting the contractual cash flows using either current market interest rates with similar remaining terms or rates estimated using internal models and broker quotes. The fair value of deposit notes issued to CIBC Capital Trust is determined by reference to the quoted market prices of CIBC Tier 1 Notes issued by CIBC Capital Trust. The fair value of deposit liabilities with embedded optionality includes the fair value of those options. The fair value of equity- and commodity-linked notes includes the fair value of embedded equity and commodity derivatives. Certain deposits designated at FVTPL are structured notes that have coupons or repayment terms linked to the performance of commodities, debt or equity securities. Fair value of these structured notes is estimated using internally vetted valuation models for the debt and embedded derivative portions of the notes by incorporating market observable prices of the referenced securities or comparable securities, and other inputs such as interest rate yield curves, market volatility levels, foreign exchange rates and changes in our own credit risk, where appropriate. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate market risk valuation adjustments for such inputs are assessed in all such instances. The fair value of secured borrowings, which comprises liabilities issued by or as a result of activities associated with the securitization of residential mortgages, the Covered Bond Programme, and consolidated securitization vehicles, is based on identical or proxy market observable quoted bond prices or determined by discounting the contractual cash flows using maximum market observable inputs, such as market interest rates, or credit spreads implied by debt instruments of similar credit quality, as appropriate. #### Subordinated indebtedness The fair value of subordinated indebtedness is determined by reference to market prices for the same or similar debt instruments. #### Derivative instruments The fair value of exchange-traded derivatives such as options and futures is based on quoted market prices. OTC derivatives primarily consist of interest rate swaps, foreign exchange forwards, equity and commodity derivatives, interest rate and currency derivatives, and credit derivatives. For such instruments, where quoted market prices or third-party consensus pricing information are not available, valuation techniques are employed to estimate fair value on the 124 CIBC 2019 ANNUAL REPORT --- basis of pricing models. Such vetted pricing models incorporate current market measures for interest rates, foreign exchange rates, equity and commodity prices and indices, credit spreads, corresponding market volatility levels, and other market-based pricing factors. In order to reflect the observed market practice of pricing collateralized and uncollateralized derivatives, our valuation approach uses overnight indexed swap (OIS) curves as the discount rate for valuing collateralized derivatives and uses an estimated market cost of funds curve as the discount rate for valuing uncollateralized derivatives. The impact of valuing uncollateralized derivatives based on an estimated market cost of funds curve reduces the fair value of uncollateralized derivative assets incremental to the reduction in fair value for credit risk already reflected through the credit valuation adjustment (CVA). In contrast, the use of a market cost of funds curve reduces the fair value of uncollateralized derivative liabilities in a manner that generally includes adjustments for our own credit. As market practices continue to evolve in regard to derivative valuation, further adjustments may be required in the future. In determining the fair value of complex and customized derivatives, such as equity, credit, and commodity derivatives written in reference to indices or baskets of reference, we consider all reasonably available information including any relevant observable market inputs, third-party consensus pricing inputs, indicative dealer and broker quotations, and our own internal model-based estimates, which are vetted and pre-approved in accordance with our model risk policy, and are regularly and periodically calibrated. The model calculates fair value based on inputs specific to the type of contract, which may include stock prices, correlation for multiple assets, interest rates, foreign exchange rates, yield curves, and volatility surfaces. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances. In addition to reflecting estimated market funding costs in our valuation of uncollateralized derivative receivables, we also consider whether a CVA is required to recognize the risk that any given derivative counterparty may not ultimately be able to fulfill its obligations. The CVA is driven off market-observed credit spreads or proxy credit spreads and our assessment of the net counterparty credit risk exposure. In assessing this exposure, we also take into account credit mitigants such as collateral, master netting arrangements, and settlements through clearing houses. As noted above, the fair value of uncollateralized derivative liabilities based on market cost of funding generally includes adjustments for our own credit. #### Mortgage commitments The fair value of mortgage commitments designated at FVTPL is for fixed-rate residential mortgage commitments and is based on changes in market interest rates for the loans between the commitment and the consolidated balance sheet dates. The valuation model takes into account the expected probability that outstanding commitments will be exercised as well as the length of time the commitment is offered. CIBC 2019 ANNUAL REPORT 125 --- ## Fair value of financial instruments The table below presents the fair values by level within the fair value hierarchy for those assets and liabilities in which fair value is not assumed to equal the carrying value: | \$ millions, as at October 31 | **Level 1** | **Level 2** | **Level 3** | **Total** | **Total** | | :--- | :---: | :---: | :---: | :---: | :---: | | | **Quoted market price** | **Valuation technique - observable market inputs** | **Valuation technique - non-observable market inputs** | **2019** | **2018** | | **2019 Financial assets** | | | | | | | Cash and deposits with banks | \$ | \$ 639 | \$ 54 | \$ 17,359 | \$ 17,359 | | **Securities** | | | | | | | Mandatorily measured at FVTPL | 20,115 | 53,984 | 413 | 46,798 | 121,310 | | Cash collateral on securities borrowed | | | | 3,664 | 3,664 | | Securities purchased under resale agreements | 50,913 | 5,198 | | 56,111 | 56,111 | | **Loans** | | | | | | | Residential mortgages | 208,381 | 60 | | 208,441 | 208,693 | | Personal | 43,098 | | | 43,098 | 43,120 | | Credit card | 12,335 | | | 12,335 | 12,335 | | Business and government | 103,885 | 21,182 | | 125,067 | 125,160 | | Derivative instruments | | | | 23,895 | 23,895 | | Customers' liability under acceptances | | | | 9,167 | 9,167 | | Other assets | | | | 13,829 | 13,829 | | **Financial liabilities** | | | | | | | Deposits | \$ 176,340 | \$ 1,751 | \$ 9,135 | \$ 178,091 | \$ 178,046 | | Business and government | 248,367 | | 9,135 | 257,502 | 257,872 | | Bank | 11,224 | | | 11,224 | 11,224 | | Secured borrowings | 38,680 | 215 | | 38,895 | 39,223 | | Derivative instruments | | | | 25,113 | 25,113 | | Acceptances | 9,188 | | | 9,188 | 9,188 | | Obligations related to securities sold short | 15,635 | | | 15,635 | 15,635 | | Cash collateral on securities lent | 1,822 | | | 1,822 | 1,822 | | Obligations related to securities sold under repurchase agreements | 51,801 | | | 51,801 | 51,801 | | Other liabilities | 14,066 | 114 | 12 | 14,192 | 14,192 | | Subordinated indebtedness | 4,684 | | | 4,684 | 4,925 | | **Carrying value** | **Level 1** | **Level 2** | **Level 3** | **Total** | **Fair value** | **Fair value over (under) carrying value** | | :--- | :---: | :---: | :---: | :---: | :---: | :---: | | **\$ millions, as at October 31** | **Quoted market price** | **Valuation technique - observable market inputs** | **Valuation technique - non-observable market inputs** | **2019** | **2018** | **2019** | **2018** | **2019** | **2018** | | **2018 Financial assets** | | | | | | | | | | | Cash and deposits with banks | \$ | \$ 639 | \$ 54 | \$ 17,691 | \$ 17,691 | | | | | | **Securities** | | | | | | | | | | | Mandatorily measured at FVTPL | 12,876 | 52,394 | 184 | 36,210 | 101,664 | 101,507 | (157) | | Cash collateral on securities borrowed | 5,488 | | | | 5,488 | 5,488 | | | | | Securities purchased under resale agreements | 40,128 | 3,322 | | | 43,450 | 43,450 | | | | | **Loans** | | | | | | | | | | | Residential mortgages | 207,523 | 12 | | | 207,535 | 205,868 | (1,667) | | Personal | 42,577 | | | | 42,577 | 42,559 | (18) | | Credit card | 12,255 | | | | 12,255 | 12,255 | | | | | Business and government | 92,605 | 16,424 | | | 109,029 | 108,917 | (112) | | Derivative instruments | | | | | 21,431 | 21,431 | | | | | Customers' liability under acceptances | | | | | 10,265 | 10,265 | | | | | Other assets | | | | | 10,230 | 10,230 | | | | | **Financial liabilities** | | | | | | | | | | | Deposits | \$ 163,113 | \$ | \$ 766 | \$ | \$ 163,879 | \$ 163,642 | | (237) | | Personal | 233,174 | | 6,975 | | 240,149 | 240,374 | 225 | | Bank | 14,380 | | | | 14,380 | 14,380 | | | | | Secured borrowings | 42,481 | 126 | | | 42,607 | 42,868 | 261 | | Derivative instruments | | | | | 20,973 | 20,973 | | | | | Acceptances | 10,296 | | | | 10,296 | 10,296 | | | | | Obligations related to securities sold short | 13,782 | | | | 13,782 | 13,782 | | | | | Cash collateral on securities lent | 2,731 | | | | 2,731 | 2,731 | | | | | Obligations related to securities sold under repurchase agreements | 30,840 | | | | 30,840 | 30,840 | | | | | Other liabilities | 13,030 | 95 | 17 | | 13,142 | 13,142 | | | | | Subordinated indebtedness | 4,080 | | | | 4,080 | 4,340 | 260 | The table below presents the fair values of financial instruments by level within the fair value hierarchy: | \$ millions, as at October 31 | **Level 1** | **Level 2** | **Level 3** | **Total** | **Total** | | :--- | ---: | ---: | ---: | ---: | :---: | | | **Quoted market price** | **Valuation technique - observable market inputs** | **Valuation technique - non-observable market inputs** | **2019** | **2018** | | **Financial assets** | | | | | | | Deposits with banks | \$ | \$ 639 | \$ 54 | \$ 639 | \$ 54 | | **Securities mandatorily measured and designated at FVTPL** | | | | | | | Government issued or guaranteed | 2,372 | 4,264 | 19,306 $^{(1)}$ | 16,328 $^{(1)}$ | 21,678 | 20,592 | | Corporate equity | 25,852 | 25,140 | 684 | 208 | 26,543 | 25,354 | | Corporate debt | | 3,760 | 3,675 | 23 | 26 | 3,783 | 3,701 | | Mortgage- and asset-backed | | 2,220 $^{(2)}$ | 2,612 $^{(2)}$ | 173 | 319 | 2,393 | 2,931 | | | 28,224 | 29,404 | 25,970 | 22,823 | 203 | 351 | 54,397 | 52,578 | | **Loans mandatorily measured at FVTPL** | | | | | | | | | | Business and government | | 20,351 | 15,942 | 831 | 482 | 21,182 | 16,424 | | Residential mortgages | | 60 | 12 | | | 60 | 12 | | | | 20,411 | 15,954 | 831 | 482 | 21,242 | 16,436 | | **Debt securities measured at FVOCI** | | | | | | | | | | | Government issued or guaranteed | 2,369 | 2,844 | 35,460 | 24,763 | | | 37,829 | 27,607 | | Corporate debt | | 5,621 | 4,543 | | | 5,621 | 4,543 | | Mortgage- and asset-backed | | 2,746 | 3,498 | | | 2,746 | 3,498 | | | 2,369 | 2,844 | 43,827 | 32,804 | | | 46,196 | 35,648 | | **Equity securities designated at FVOCI** | | | | | | | | | | | Corporate equity | 45 | 42 | 266 | 235 | 291 | 285 | 602 | 562 | | | 45 | 42 | 266 | 235 | 291 | 285 | 602 | 562 | | **Securities purchased under resale agreements measured at FVTPL** | | | 5,198 | 3,322 | | | 5,198 | 3,322 | | **Derivative instruments** | | | | | | | | | | | Interest rate | | 9,086 | 5,593 | 56 | | | 9,146 | 5,593 | | Foreign exchange | | 8,939 | 9,303 | | | 8,939 | 9,303 | | Credit | 2,383 | 1,727 | 1,111 | 1,783 | 252 | 107 | 3,746 | 3,617 | | Equity | | 383 | 143 | 356 | 1,220 | 206 | 356 | 206 | | Precious metal | | | | | | | | | | | Other commodity | 2,770 | 1,870 | 20,713 | 19,339 | 412 | 222 | 23,895 | 21,431 | | **Total financial assets** | **\$ 33,408** | **\$ 34,160** | **\$ 117,024** | **\$ 94,531** | **\$ 1,737** | **\$ 1,340** | **\$ 152,169** | **\$ 130,031** | | **Financial liabilities** | | | | | | | | | | | Deposits and other liabilities $^{(3)}$ | \$ (7,258) | \$ (4,443) | \$ (10,626) | \$ (7,556) | \$ (601) | \$ (423) | \$ (11,227) | \$ (7,979) | | Obligations related to securities sold short | | | (19,003) | (16,895) | | | (26,862) | (21,761) | | **Derivative instruments** | | | | | | | | | | | Interest rate | | (8,322) | (6,152) | | (109) | | (8,323) | (6,261) | | Foreign exchange | | (10,291) | (9,335) | | | | (10,291) | (9,335) | | Credit | | (1,824) | (1,489) | | (112) | | (131) | (147) | | Equity | | (300) | (487) | | (155) | | (4,386) | (3,876) | | Precious metal | | (212) | (258) | | | | (212) | (258) | | Other commodity | (2,124) | (1,976) | (22,721) | (18,638) | (268) | (359) | (25,113) | (20,973) | | **Total financial liabilities** | **\$ (9,382)** | **\$ (6,419)** | **\$ (41,724)** | **\$ (35,533)** | **\$ (869)** | **\$ (782)** | **\$ (51,975)** | **\$ (42,734)** | $^{(1)}$ Includes \$56 million related to securities designated at FVTPL (2018: \$52 million). $^{(2)}$ Includes \$357 million related to asset-backed securities designated at FVTPL (2018: \$132 million). $^{(3)}$ Comprises deposits designated at FVTPL of \$10,458 million (2018: \$7,517 million), net bifurcated embedded derivative liabilities of \$643 million (2018: \$350 million), other liabilities designated at FVTPL of \$12 million (2018: \$17 million), and other financial liabilities measured at fair value of \$114 million (2018: \$95 million). ### Transfers between levels in the fair value hierarchy Transfers between levels in the fair value hierarchy are deemed to have occurred at the beginning of the year in which the transfer occurred. Transfers between levels can occur as a result of additional or new information regarding valuation inputs and changes in their observability. During the year, we transferred \$25 million of securities mandatorily measured at FVTPL (2018: \$211 million) and \$431 million of securities sold short (2018: nil) from Level 1 to Level 2, and \$379 million of securities sold short (2018: nil) from Level 2 to Level 1 due to changes in the observability of the inputs used to value these securities. In addition, transfers between Level 2 and Level 3 were made during 2019 and 2018, primarily due to changes in the observability of certain market volatility inputs that were used in measuring the fair value of our embedded derivatives. The following table presents the changes in fair value of financial assets and liabilities in Level 3. These instruments are measured at fair value utilizing non-observable market inputs. We often hedge positions with offsetting positions that may be classified in a different level. As a result, the gains and losses for assets and liabilities in the Level 3 category presented in the table below do not reflect the effect of offsetting gains and losses on the related hedging instruments that are classified in Level 1 and Level 2. | \$ millions, for the year ended October 31 | **IAS 39 Opening balance** | **Reclassification upon adoption of IFRS 9 $^{(2)}$** | **IFRS 9 Opening balance** | **Net gains (losses) included in income $^{(1)}$** | **Net unrealized gains (losses) included in OCI $^{(3)}$** | **Transfer in to Level 3** | **Transfer out of Level 3** | **Purchases/ Issuances** | **Sales/ Settlements** | **Closing balance** | | :--- | ---: | ---: | ---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | | **2019** | | | | | | | | | | | | **Securities mandatorily measured at FVTPL** | | | | | | | | | | | | Corporate equity | n/a | n/a | \$ 6 | \$ | \$ 1 | \$ | \$ | \$ | \$ | \$ 7 | | Corporate debt | n/a | n/a | 26 | | (3) | | | | (22) | 23 | | Mortgage- and asset-backed | n/a | n/a | 319 | 1 | 74 | | | | (221) | 173 | | **Securities designated at FVTPL** | | | | | | | | | | | | Asset-backed | n/a | n/a | | | | | | 856 | (506) | 831 | | **Loans mandatorily measured at FVTPL** | | | | | | | | | | | | Business and government | n/a | n/a | 482 | | (1) | | | | | | | **Debt securities measured at FVOCI** | | | | | | | | | | | | Government issued or guaranteed | n/a | n/a | | | | | | | | | | Corporate debt | n/a | n/a | | | | | | | | | | Mortgage- and asset-backed | n/a | n/a | | | | | | | | | | **Equity securities designated at FVOCI** | | | | | | | | | | | | Corporate equity | n/a | n/a | 285 | 2 | 74 | | | | (70) | 291 | | **Derivative instruments** | | | | | | | | | | | | Interest rate | n/a | n/a | 59 | 2 | (5) | | | | | 56 | | Credit | n/a | n/a | 115 | (9) | (2) | | | | | 104 | | Equity | n/a | n/a | 107 | 15 | (24) | | | | | 202 | | **Total assets** | **n/a** | **n/a** | **\$ 1,340** | **\$ (9)** | **\$ 71** | **\$ 1** | **\$** | **\$ (24)** | **\$ 1,208** | **\$ (850)** | **\$ 1,737** | | **Deposits and other liabilities $^{(6)}$** | | | | | | | | | | | | Derivative instruments | n/a | n/a | | \$ (423) | \$ (113) | \$ | \$ (100) | \$ 117 | \$ (288) | \$ 206 | \$ (601) | | Interest rate | n/a | n/a | | (109) | | | | | | (112) | | Credit | n/a | n/a | | (131) | 9 | 3 | | | | 7 | (112) | | Equity | n/a | n/a | | (119) | (89) | | 77 | (70) | 46 | (155) | | **Total liabilities** | **n/a** | **n/a** | **\$ 782** | **\$ 9** | **\$ (67)** | **\$** | **\$ (100)** | **\$ 194** | **\$ (358)** | **\$ 235** | **\$ (869)** | | **2018** | | | | | | | | | | | | **Securities mandatorily measured at FVTPL** | | | | | | | | | | | | Corporate equity | \$ 32 | \$ 10 | \$ 42 | \$ 2 | \$ (3) | \$ | \$ | \$ | \$ | \$ (35) | \$ 6 | | Corporate debt | | 26 | 26 | | | | | | | | | Mortgage- and asset-backed | 3 | 707 | 710 | 3 | 9 | 12 | | | (510) | 319 | | **Securities designated at FVTPL** | | | | | | | | | | | | Asset-backed | 94 | (94) | | | | | | | | | | **Loans mandatorily measured at FVTPL** | | | | | | | | | | | | Business and government | 103 | 363 | 466 | (5) | (5) | | | (2) | 795 | (767) | 482 | | **Debt securities measured at FVOCI** | | | | | | | | | | | | Government issued or guaranteed | | 479 | (479) | | | | | | | | | Corporate debt | 4 | (5) | 1 | | | | | 26 | (26) | | | Mortgage- and asset-backed | 1,674 | (1,674) | | | | | | | | | | **Equity securities designated at FVOCI** | | | | | | | | | | | | Corporate equity | 289 | (10) | 279 | (3) | (2) | | | 5 | 219 | (213) | 285 | | **Derivative instruments** | | | | | | | | | | | | Interest rate | 28 | | 28 | | (20) | | | | | | (8) | | Credit | 130 | | 130 | | (17) | | | | | | 115 | | Equity | 38 | | 38 | | 2 | | | | | | (27) | | **Total assets** | **\$ 2,395** | **\$ (698)** | **\$ 1,697** | **\$ (20)** | **\$ (45)** | **\$ 503** | **\$ (3)** | **\$ 1,270** | **\$ (2,062)** | **\$ 1,340** | | **Deposits and other liabilities $^{(6)}$** | | | | | | | | | | | | Derivative instruments | \$ (369) | | \$ (369) | \$ 117 | \$ | \$ (126) | \$ 81 | \$ (226) | \$ 100 | \$ (423) | | Interest rate | | (20) | (148) | 17 | | | (79) | | | (109) | | Credit | | (148) | | (2) | 40 | | | (10) | | (131) | | Equity | | (77) | | (77) | | | | | | (119) | | **Total liabilities** | **\$ (614)** | **\$** | **\$ (614)** | **\$ 17** | **\$ 76** | **\$ 182** | **\$ (782)** | | | | $^{(1)}$ Cumulative AOCI gains or losses related to equity securities designated at FVOCI are reclassified from AOCI to retained earnings at the time of disposal or derecognition. $^{(2)}$ Certain reclassifications have been made upon adoption of IFRS 9. See Note 1 for more details about our transition to IFRS 9 on November 1, 2017. $^{(3)}$ Includes foreign currency gains and losses related to debt securities measured at FVOCI. $^{(4)}$ Comprises unrealized gains and losses relating to these assets and liabilities held at the end of the reporting year. $^{(5)}$ Foreign exchange translation on loans mandatorily measured at FVTPL held by foreign operations and denominated in the same currency as the foreign operations is included in OCI. $^{(6)}$ Includes deposits designated at FVTPL of \$135 million (2018: \$112 million) and net bifurcated embedded derivative liabilities of \$466 million (2018: \$311 million). n/a Not applicable. CIBC 2019 ANNUAL REPORT 129 --- ## Sensitivity of Level 3 financial assets and liabilities The following section describes the significant non-observable inputs identified in the table above, the interrelationships between those inputs, where applicable, and the change in fair value if changing one or more of the non-observable inputs within a reasonably possible range would impact the fair value significantly. The fair value of our investments in private companies is based on recent transactions, if available. Otherwise, the fair value is derived from applying applicable valuation multiples to financial indicators such as revenue or earnings. Earnings multiples or revenue multiples represent the ratios of earnings or revenue to enterprise value and are often used as non-observable inputs in the fair value measurement of our investments in private companies. We apply professional judgment in our selection of the multiple from comparable listed companies, which is then further adjusted for company-specific factors. The fair value of private companies is sensitive to changes in the multiple we apply. An increase or a decrease in earnings multiples or revenue multiples generally results in an increase or a decrease, respectively, in the fair value of our investments in private companies. By adjusting the multiple upward and downward within a reasonably possible range, the aggregate fair value of our investments in private companies would increase by **\$48 million** or decrease by **\$2 million** (2018: increase by \$11 million or decrease by \$8 million). The fair value of our limited partnerships is determined based on the net asset value provided by the fund managers, adjusted as appropriate. The fair value of limited partnerships is sensitive to changes in the net asset value, and by adjusting the net asset value within a reasonably possible range, the aggregate fair value of our limited partnerships would increase or decrease by **\$34 million** (2018: \$23 million). While our standalone derivatives are recorded as derivative assets or derivative liabilities, our derivatives embedded in our structured note deposit liabilities or deposit liabilities designated at FVTPL are recorded within deposits and other liabilities. The determination of the fair value of certain Level 3 embedded derivatives and certain standalone derivatives requires significant assumptions and judgment to be applied to both the inputs and the valuation techniques employed. These derivatives are sensitive to long-dated market volatility and correlation inputs, which we consider to be non-observable. Market volatility is a measure of the anticipated future variability of a market price and is an important input for pricing options, which are inherent in many of our Level 3 derivatives. A higher market volatility generally results in a higher option price, with all else held constant, due to the higher probability of obtaining a greater return from the option, and results in an increase in the fair value of our Level 3 derivatives. Correlation inputs are used to value those derivatives where the payout is dependent upon more than one market price. For example, the payout of an equity basket option is based upon the performance of a basket of stocks, and the interrelationships between the price movements of those stocks. A positive correlation implies that two inputs tend to change the fair value in the same direction, while a negative correlation implies that two inputs tend to change the fair value in the opposite direction. Changes in market correlation could result in an increase or a decrease in the fair value of our Level 3 derivatives and embedded derivatives. By adjusting the non-observable inputs by reasonably alternative amounts, the fair value of our net Level 3 standalone derivatives and embedded derivatives would increase by **\$45 million** or decrease by **\$33 million** (2018: increase by \$67 million or decrease by \$68 million). --- ## Quantitative information about significant non-observable inputs Valuation techniques using one or more non-observable inputs are used for a number of financial instruments. The following table discloses the valuation techniques and quantitative information about the significant non-observable inputs used in Level 3 financial instruments: | \$ millions, as at October 31 | **2019** | **Valuation techniques** | **Key non-observable inputs** | **Range of inputs** | | :--- | ---: | :--- | :--- | :---: | :---: | | | | | | **Low** | **High** | | **Securities mandatorily measured at FVTPL** | | | | | | | Corporate equity | \$ 7 | Valuation multiple | Earnings multiple | 15.1 | 15.1 | | Corporate debt | 23 | Discounted cash flow | Discount rate | 7.5% | 7.5% | | Mortgage- and asset-backed | 173 | Discounted cash flow | Credit spread | 0.9% | 2.3% | | | | Market proxy or direct broker quote | Market proxy or direct broker quote | 0.0 % | 0.5% | | **Equity securities designated at FVOCI** | | | | | | | Corporate equity | 225 | Adjusted net asset value $^{(1)}$ | Net asset value | n/a | n/a | | Limited partnerships | 66 | Adjusted net asset value $^{(1)}$ | Net asset value | n/a | n/a | | Private companies | | Valuation multiple | Revenue multiple | 2.6 | 2.6 | | **Loans mandatorily measured at FVTPL** | | | | | | | Business and government | 831 | Discounted cash flow | Credit spread | 0.6% | 1.6% | | **Derivative instruments** | | | | | | | Interest rate | 56 | Proprietary model$^{(2)}$ | n/a | n/a | n/a | | | | Option model | Market volatility | 49.7 % | 69.4% | | Credit | 104 | Market proxy or direct broker quote | Market proxy or direct broker quote | 0.0 % | 20.5% | | Equity | 252 | Option model | Market volatility | 14.0 % | 14.0% | | | | | Market correlation | 23.3% | 88.8% | | **Total assets** | **\$ 1,737** | | | | | | | **Deposits and other liabilities** | **\$ (601)** | | | | | | | Derivative instruments | | | | | | | | Interest rate | | Proprietary model$^{(2)}$ | n/a | n/a | n/a | | Credit | | Option model | Market volatility | 49.7% | 69.4% | | Equity | | Market proxy or direct broker quote | Market proxy or direct broker quote | 0.0 % | 20.5% | | | | Option model | Market volatility | 7.1% | 98.0% | | | | | Market correlation | 4.8% | 58.7% | | **Total liabilities** | **\$ (869)** | | | | | | $^{(1)}$ Adjusted net asset value is determined using reported net asset values obtained from the fund manager or general partner of the limited partnership or the limited liability company and may be adjusted for current market levels where appropriate. $^{(2)}$ Using valuation techniques that we consider to be non-observable. n/a Not applicable. The fair value of our investments in private companies is based on recent transactions, if available. Otherwise, the fair value is derived from applying applicable valuation multiples to financial indicators such as revenue or earnings. Earnings multiples or revenue multiples represent the ratios of earnings or revenue to enterprise value and are often used as non-observable inputs in the fair value measurement of our investments in private companies. We apply professional judgment in our selection of the multiple from comparable listed companies, which is then further adjusted for company-specific factors. The fair value of private companies is sensitive to changes in the multiple we apply. An increase or a decrease in earnings multiples or revenue multiples generally results in an increase or a decrease, respectively, in the fair value of our investments in private companies. By adjusting the multiple upward and downward within a reasonably possible range, the aggregate fair value of our investments in private companies would increase by **\$48 million** or decrease by **\$2 million** (2018: increase by \$11 million or decrease by \$8 million). The fair value of our limited partnerships is determined based on the net asset value provided by the fund managers, adjusted as appropriate. The fair value of limited partnerships is sensitive to changes in the net asset value, and by adjusting the net asset value within a reasonably possible range, the aggregate fair value of our limited partnerships would increase or decrease by **\$34 million** (2018: \$23 million). While our standalone derivatives are recorded as derivative assets or derivative liabilities, our derivatives embedded in our structured note deposit liabilities or deposit liabilities designated at FVTPL are recorded within deposits and other liabilities. The determination of the fair value of certain Level 3 embedded derivatives and certain standalone derivatives requires significant assumptions and judgment to be applied to both the inputs and the valuation techniques employed. These derivatives are sensitive to long-dated market volatility and correlation inputs, which we consider to be non-observable. Market volatility is a measure of the anticipated future variability of a market price and is an important input for pricing options, which are inherent in many of our Level 3 derivatives. A higher market volatility generally results in a higher option price, with all else held constant, due to the higher probability of obtaining a greater return from the option, and results in an increase in the fair value of our Level 3 derivatives. Correlation inputs are used to value those derivatives where the payout is dependent upon more than one market price. For example, the payout of an equity basket option is based upon the performance of a basket of stocks, and the interrelationships between the price movements of those stocks. A positive correlation implies that two inputs tend to change the fair value in the same direction, while a negative correlation implies that two inputs tend to change the fair value in the opposite direction. Changes in market correlation could result in an increase or a decrease in the fair value of our Level 3 derivatives and embedded derivatives. By adjusting the non-observable inputs by reasonably alternative amounts, the fair value of our net Level 3 standalone derivatives and embedded derivatives would increase by **\$45 million** or decrease by **\$33 million** (2018: increase by \$67 million or decrease by \$68 million). 130 CIBC 2019 ANNUAL REPORT --- ## Financial instruments designated at FVTPL Financial assets designated at FVTPL include certain debt securities that were designated at FVTPL on the basis of being managed together with derivatives to eliminate or significantly reduce financial risks. Deposits and other liabilities designated at FVTPL include: * Certain business and government deposit liabilities and certain secured borrowings that are economically hedged with derivatives and other financial instruments, and certain financial liabilities that have one or more embedded derivatives that significantly modify the cash flows of the host liability but are not bifurcated from the host instrument; and * Our mortgage commitments to retail clients to provide mortgages at fixed rates that are economically hedged with derivatives and other financial instruments. The carrying value of our securities designated at FVTPL represents our maximum exposure to credit risk related to these assets designated at FVTPL. The change in fair value attributable to change in credit risk of these assets designated at FVTPL during the year is insignificant (2018: insignificant). The fair value of a liability designated at FVTPL reflects the credit risk relating to that liability. For those liabilities designated at FVTPL for which we believe changes in our credit risk would impact the fair value from the note holders' perspective, the related fair value changes were recognized in OCI. Changes in fair value attributable to changes in our own credit are measured as the difference between: (i) the period-over-period change in the present value of the expected cash flows using a discount curve adjusted for our own credit; and (ii) the period-over-period change in the present value of the same expected cash flows using a discount curve based on the benchmark curve adjusted for our own credit as implied at inception of the liability designated at FVTPL. The pre-tax impact of changes in CIBC's own credit risk on our liabilities designated at FVTPL was gains of \$39 million for the year and gains of \$21 million cumulatively (2018: losses of \$4 million for the year and losses of \$18 million cumulatively). A net loss of \$32 million, net of hedges, was realized for assets designated at FVTPL and liabilities designated at FVTPL, which is included in the consolidated statement of income under Gains (losses) from financial instruments measured/designated at FVTPL, net (2018: a net gain of \$37 million). The estimated contractual amount payable at maturity of deposits designated at FVTPL, which is based on the par value and the intrinsic value of the applicable embedded derivatives, is \$283 million higher (2018: \$391 million higher) than its fair value. ### Note 3 Significant transactions #### Sale of FirstCaribbean International Bank Limited On November 8, 2019, we announced that we had entered into a definitive agreement to sell our controlling interest in FirstCaribbean International Bank Limited (CIBC FirstCaribbean) to GNB Financial Group Limited (GNB). Under the terms of the agreement, GNB will acquire 66.73% of CIBC FirstCaribbean's outstanding shares from CIBC for total consideration of approximately US\$797 million, subject to closing adjustments to reflect certain changes in CIBC FirstCaribbean's book value prior to closing. The total consideration is comprised of approximately US\$200 million in cash and secured financing provided by CIBC for the remainder. CIBC will also provide secured financing to facilitate the purchase of any shares tendered by the minority shareholders of CIBC FirstCaribbean under the take-over bid required by local securities laws. We expect to retain a minority interest in CIBC FirstCaribbean of approximately 24.9% after closing, which will be accounted for as an investment in associate using the equity method. This transaction is subject to regulatory approvals and is expected to close in 2020. Cumulative foreign exchange translation gains, net of designated hedges, related to our investment in CIBC FirstCaribbean of approximately \$280 million after-tax were included in AOCI as at October 31, 2019. Our cumulative foreign exchange translation gains relating to CIBC FirstCaribbean will be reclassified into income upon closing, and remain subject to change from movements in foreign exchange rates until closing. Due to the valuation implied from the expected sale of our controlling interest in CIBC FirstCaribbean, we recognized a goodwill impairment charge of \$135 million in the fourth quarter of 2019 (see Note 8 for additional details). #### 2019 Acquisition of Cleary Gull On September 9, 2019, we completed the acquisition of substantially all of the assets and operations of Cleary Gull Inc. (Cleary Gull), a Milwaukee-based boutique investment banking firm specializing in middle-market mergers and acquisitions, private capital placement and debt advisory across the United States. Goodwill and intangible assets of \$16 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our Capital Markets strategic business unit. #### Acquisition of Lowenhaupt Global Advisors On September 1, 2019, we completed the acquisition of substantially all of the assets and operations of Lowenhaupt Global Advisors, LLC (LGA), a wealth advisory firm in St. Louis and New York that provides independent advice on family wealth transfer, taxation, investment portfolio allocation and business structuring. Goodwill and intangible assets of \$14 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our U.S. Commercial Banking and Wealth Management strategic business unit. #### Finalization of arrangement with Air Canada Following the close of Air Canada's acquisition of the Aeroplan loyalty business from Aimia Inc. on January 10, 2019, we will be offering credit cards under Air Canada's new loyalty program, which is expected to launch in 2020. This program will allow CIBC's Aeroplan cardholders to transfer their Aeroplan Miles to Air Canada's new loyalty program. To secure our participation in Air Canada's new loyalty program for a period of 10 years, we paid Air Canada \$200 million plus applicable sales tax, which we recognized as an expense in the first quarter of 2019. In addition, we made a payment of \$92 million plus applicable sales tax in the first quarter of 2019 as a prepayment to be applied towards future monthly payments in respect of Aeroplan Miles over a 10-year period. CIBC 2019 ANNUAL REPORT 131 --- ### 2018 Acquisition of Wellington Financial On January 5, 2018, CIBC acquired both the loan assets of Wellington Financial and its management team for a combination of cash, common shares, and exchangeable shares. The acquisition supports the launch of CIBC Innovation Banking, a full service business that delivers strategic advice and funding to North American technology and innovation clients at each stage of their business cycle, and further deepens CIBC's capabilities and complements CIBC Bank USA's existing commercial banking team. Goodwill of \$62 million was recognized as a result of the acquisition. The exchangeable shares issued as part of the consideration for the acquisition are economically equivalent to CIBC common shares, and are subject to various vesting and performance conditions. A portion of the exchangeable shares are treated as equity-settled share-based compensation awards, and are amortized into income over the relevant vesting periods. The results of the acquired business have been consolidated from the date of close and are included in our Canadian Commercial Banking and Wealth Management SBU. ### 2017 (finalized in 2018) Acquisition of PrivateBancorp, Inc. On June 23, 2017, we completed the acquisition of PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (The PrivateBank, subsequently rebranded as CIBC Bank USA) for total consideration of US\$5.0 billion (C\$6.6 billion). This acquisition expands our U.S. presence which diversifies earnings and strengthens our platform for long-term growth. The acquisition also creates a platform for CIBC to deliver high-quality middle market commercial and private banking capabilities, which advances our client-focused strategy. We acquired 100% of the outstanding share capital of PrivateBancorp for a final transaction value of US\$61.00 per PrivateBancorp share. During the first quarter of 2018, we finalized the purchase price allocation, and recognized an increase in goodwill of \$29 million primarily due to additional information arising from the settlement of the dispute with former PrivateBancorp shareholders who validly exercised their dissent and appraisal rights under Delaware law. The following summarizes the total purchase consideration of \$6.6 billion as of the acquisition date, including the impact of final settlement of obligation to dissenting shareholders in the first quarter of 2018: | \$ millions, as at June 23, 2017 | Amount | | :--- | ---: | | Issuance of CIBC common shares $^{(1)}$ | \$ 3,443 | | Cash $^{(2)}$ | 2,770 | | Estimated obligation payable to dissenting shareholders $^{(3)}$ | 327 | | Issuance of replacement equity-settled awards $^{(4)}$ | 72 | | **Total purchase consideration estimated in 2017** | **\$ 6,612** | | Adjustment to purchase consideration in 2018 $^{(3)}$ | 29 | | **Total final purchase consideration** | **\$ 6,641** | $^{(1)}$ 32,137,402 CIBC common shares were issued at a price of US\$80.95 per share to satisfy the equity component of the merger consideration of 0.4176 of a CIBC common share per PrivateBancorp share. $^{(2)}$ US\$2.1 billion in cash was transferred to satisfy the cash component of the merger consideration of US\$27.20 per PrivateBancorp share. $^{(3)}$ Former PrivateBancorp shareholders who validly exercised their dissent and appraisal rights under Delaware law did not receive the merger consideration and instead filed petitions against PrivateBancorp seeking a payment equal to the "fair value" of their PrivateBancorp shares as determined by a Delaware court following an appraisal proceeding. In such a proceeding, a Delaware court may require a purchaser to pay to the dissenting shareholders an amount more or less than, or the same as, the merger consideration. As at June 23, 2017, CIBC estimated the fair value of the obligation payable to dissenting shareholders using the final transaction value of US\$61.00 per PrivateBancorp share. In November 2017, CIBC and the petitioners entered into an agreement to settle the dispute, subject to the court's entry of an order dismissing the consolidated petition. This matter was settled in November 2017 through a combination of \$162 million cash and \$194 million CIBC common shares, and resulted in an increase in goodwill of \$29 million. $^{(4)}$ Equity-settled share-based awards issued to employees of PrivateBancorp and The PrivateBank consisted of 190,789 replacement restricted shares and 988,544 replacement stock options with a fair value of US\$54 million relating to the portion of these awards attributable to pre-acquisition service. The fair values of the restricted shares and the stock options were estimated based on the final transaction value of US\$61.00 per PrivateBancorp share. The following summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date that were reflected in 2017, updated for the impact of final settlement of obligation to dissenting shareholders in the first quarter of 2018: | \$ millions, as at June 23, 2017 | Amount | | :--- | ---: | | **Fair values of assets acquired** | | | Cash and non-interest-bearing deposits with banks | \$ 280 | | Interest-bearing deposits with banks | 441 | | AFS and HTM securities | 5,577 | | Loans $^{(1)}$ | 20,642 | | Other assets | 33 | | Intangible assets $^{(2)}$ | 370 | | **Total fair value of identifiable assets acquired** | **27,343** | | **Fair values of liabilities assumed** | | | Deposits | 24,059 | | Other liabilities | 496 | | **Total fair value of identifiable liabilities assumed** | **24,555** | | **Fair value of identifiable net assets acquired** | **2,788** | | Goodwill | 3,853 | | **Total purchase consideration** | **\$ 6,641** | $^{(1)}$ The fair value for loans reflects estimates of incurred and expected future credit losses at the acquisition date and interest rate premiums or discounts relative to prevailing market rates. The gross principal amount is \$20.9 billion. $^{(2)}$ Intangible assets include core deposits, customer relationships, and software. Core deposit and customer relationship intangibles arising from the acquisition are amortized on a straight-line basis over estimated useful lives, which range from 3-10 years. The goodwill recognized of \$3.9 billion primarily reflects the expected growth of our combined U.S. Commercial Banking and Wealth Management businesses, the ability to cross sell products between SBUs, and expected synergies from the integration of certain technology and operational platforms. Goodwill is not expected to be deductible for tax purposes. All results of operations are included in our U.S. Commercial Banking and Wealth Management SBU. In 2017, our acquisition of PrivateBancorp increased our consolidated revenue and net income by \$448 million and \$96 million, respectively. If our acquisition of PrivateBancorp had occurred on November 1, 2016 it would have increased our 2017 consolidated revenue and net income by \$1,228 million and \$304 million, respectively. These amounts exclude transaction and integration costs, which are primarily recognized in non-interest expenses and included in Corporate and Other. 132 CIBC 2019 ANNUAL REPORT --- ### Acquisition of Geneva Advisors On August 31, 2017, we completed the acquisition of Geneva Advisors, LLC (Geneva Advisors), an independent private wealth management firm, for total estimated consideration of US\$179 million (C\$224 million). This acquisition expands CIBC's private wealth management client base and investment management capabilities in the U.S. The purchase price consisted of \$39 million of cash consideration and 1,204,344 CIBC common shares valued at \$126 million, plus estimated contingent consideration of \$59 million to be paid over the next three years subject to future performance conditions being met. Contingent consideration of up to US\$65 million may ultimately be payable dependent upon the level of achievement of future performance conditions. The following summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date: | \$ millions, as at August 31, 2017 | Amount | | :--- | ---: | | Cash | \$ 12 | | Other assets | 2 | | Intangible assets $^{(1)}$ | 102 | | Other liabilities | (12) | | **Fair value of identifiable net assets acquired** | **104** | | Goodwill $^{(2)}$ | 120 | | **Total purchase consideration** | **\$ 224** | $^{(1)}$ Intangible assets include customer relationships and contract-based intangibles. The customer relationship intangible asset arising from the acquisition is amortized on a straight-line basis over an estimated useful life of 7 years. Contract-based intangibles arising from the acquisition are amortized on a straight-line basis over estimated useful lives, which range from 5 to 9 years. $^{(2)}$ Goodwill is expected to be deductible for tax purposes. During the first quarter of 2018, we finalized the purchase price allocation. No adjustments were recorded as a result of the finalization. All results of operations are included in our U.S. Commercial Banking and Wealth Management strategic business unit. Transaction and integration costs are included in Corporate and Other. ### Note 4 Securities #### Securities $ millions, as at October 31 | | 2019 | 2018 | | :--- | ---: | ---: | | Debt securities measured at FVOCI | \$ 46,196 | \$ 35,648 | | Equity securities designated at FVOCI | 602 | 562 | | Securities measured at amortized cost $^{(1)}$ | 54,397 | 52,578 | | Securities mandatorily measured and designated at FVTPL | 121,310 | 101,664 | | **Total securities** | **\$ 121,310** | **\$ 101,664** | $^{(1)}$ During the year, \$110 million of amortized cost debt securities were disposed of shortly before their maturity resulting in a realized loss of less than \$1 million (October 31, 2018: nil). CIBC 2019 ANNUAL REPORT 133 --- | Residual term to contractual maturity | **2019** | **2018** | | :--- | :--- | :--- | | | **Carrying value** | **Yield $^{(1)}$** | **Total** | **Carrying value** | **Yield $^{(1)}$** | **Total** | | **Debt securities measured at FVOCI** | | | | | | | | Securities issued or guaranteed by: | | | | | | | | Canadian federal government | \$ 2,452 | 1.5% | \$ 10,851 | \$ 6,620 | 2.1% | \$ 6,620 | | Other Canadian governments | 1,051 | 1.8% | 12,271 | 9,249 | 2.7% | 9,249 | | U.S. Treasury and agencies | 4,128 | 1.9% | 9,371 | 7,742 | 1.8% | 7,742 | | Other foreign governments | 2,227 | 2.2% | 5,336 | 3,996 | 2.3% | 3,996 | | Mortgage-backed securities $^{(2)}$ | 396 | 1.9% | 2,699 | 3,430 | 2.5% | 3,430 | | Asset-backed securities | 234 | 2.1% | 47 | 68 | 2.5% | 68 | | Corporate debt | 1,007 | 1.8% | 5,621 | 4,543 | 2.3% | 4,543 | | | \$ 10,865 | 2.4% | \$ 46,196 | \$ 35,648 | 2.3% | \$ 35,648 | | **Equity securities designated at FVOCI** | | | | | | | | Corporate public equity | \$ | | \$ 46 | n/m | \$ 43 | n/m | | Corporate private equity | | | 556 | n/m | 519 | n/m | | | | | \$ 602 | | \$ 562 | | | **Securities measured at amortized cost** | | | | | | | | Securities issued or guaranteed by: | | | | | | | | Canadian federal government | | 546 | \$ 36 | | | 582 | 180 | | Other Canadian governments | 2,180 | 4,514 | 54 | | | 6,748 | 4,872 | | U.S. Treasury and agencies | 781 | 5,146 | | | 5,927 | 2,329 | | Other foreign governments | 234 | 42 | | | 276 | 693 | | Mortgage-backed securities $^{(3)}$ | 231 | 962 | 987 | 384 | 1,436 | 660 | 693 | | Asset-backed securities | 5 | 153 | 305 | | | 463 | 344 | | Corporate debt | 280 | 1,764 | 75 | | | 2,119 | 731 | | | \$ 1,531 | \$ 10,793 | \$ 5,917 | \$ 1,874 | | \$ 20,115 | \$ 12,876 | | **Securities mandatorily measured and designated at FVTPL** | | | | | | | | Securities issued or guaranteed by: | | | | | | | | Canadian federal government | \$ 1,999 | \$ 2,463 | \$ 1,274 | \$ 1,467 | | \$ 7,203 | \$ 10,708 | | Other Canadian governments | 1,683 | 1,347 | 1,049 | 4,183 | | 8,262 | 8,055 | | U.S. Treasury and agencies | 121 | 2,737 | 1,943 | 273 | | 5,074 | 905 | | Other foreign governments | 238 | 703 | 164 | 34 | | 1,139 | 924 | | Mortgage-backed securities $^{(4)}$ | 95 | 968 | 112 | | | 1,175 | 1,774 | | Asset-backed securities | 155 | 451 | 228 | | | 1,218 | 1,157 | | Corporate debt | 789 | 2,245 | 571 | 178 | | 3,783 | 3,701 | | | \$ 5,080 | \$ 10,914 | \$ 5,341 | \$ 6,519 | | \$ 27,854 | \$ 27,224 | | Corporate public equity | | | | | 26,523 | | 26,523 | 25,348 $^{(5)}$ | | Corporate private equity | | | | | 20 | | 20 | 6 $^{(5)}$ | | **Total securities $^{(6)}$** | **\$ 17,476** | **\$ 50,921** | **\$ 15,133** | **\$ 10,635** | **\$ 26,543** | **\$ 121,310** | **\$ 101,664** | | **Fair value of debt securities measured and equity securities designated at FVOCI** | **2019** | **2018** | | :--- | ---: | ---: | | | **Amortized cost $^{(1)}$** | **Gross unrealized gains** | **Gross unrealized losses** | **Fair value** | **Amortized cost** | **Gross unrealized gains** | **Gross unrealized losses** | **Fair value** | | **Securities issued or guaranteed by:** | | | | | | | | | | Canadian federal government | \$ 10,842 | \$ 12 | \$ (3) | \$ 10,851 | \$ 6,608 | \$ 15 | \$ (3) | \$ 6,620 | | Other Canadian governments | 12,252 | 22 | (3) | 12,271 | 9,220 | 31 | (2) | 9,249 | | U.S. Treasury and agencies | 9,353 | 25 | (7) | 9,371 | 7,824 | 7 | (89) | 7,742 | | Other foreign governments | 5,318 | 25 | (7) | 5,336 | 3,997 | 16 | (17) | 3,996 | | Mortgage-backed securities | 2,688 | 15 | (4) | 2,699 | 3,476 | 5 | (51) | 3,430 | | Asset-backed securities | 47 | | | 47 | 68 | 2 | (26) | 43 | | Corporate debt | 5,608 | 16 | (3) | 5,621 | 4,567 | 2 | (26) | 4,543 | | **Corporate public equity $^{(2)}$** | 46,108 | 115 | (27) | 46,196 | 35,760 | 76 | (188) | 35,648 | | **Corporate private equity** | 40 | 15 | (9) | 46 | 34 | 14 | (5) | 43 | | | 493 | 85 | (22) | 556 | 434 | 100 | (15) | 519 | | | 533 | 100 | (31) | 602 | 468 | 114 | (20) | 562 | | **Total securities** | **\$ 46,641** | **\$ 215** | **\$ (58)** | **\$ 46,798** | **\$ 36,228** | **\$ 190** | **\$ (208)** | **\$ 36,210** | $^{(1)}$ Net of allowance for credit losses for debt securities measured at FVOCI of \$23 million (2018: \$23 million). $^{(2)}$ Includes restricted stock. Fair value of equity securities designated at FVOCI that were disposed of during the year was \$20 million (2018: \$35 million). Net realized cumulative after-tax gains of \$18 million for the year (2018: \$38 million) resulting from dispositions of equity securities designated at FVOCI and return on capital distributions from limited partnerships designated at FVOCI were reclassified from AOCI to retained earnings. Dividend income recognized for the year ended October 31, 2019 on equity securities designated at FVOCI that were still held as at October 31, 2019 was \$9 million (2018: \$5 million). No dividend income was recognized on equity securities designated at FVOCI that were disposed of during the year (2018: nil). The table below presents profit or loss recognized on FVOCI securities (2017: AFS securities): | \$ millions, for the year ended October 31 | **2019** | **2018** | **2017** | | :--- | ---: | ---: | ---: | | Realized gains | \$ 40 | \$ 56 | \$ 178 | | Realized losses | (2) | (13) | (25) | | Provision for credit losses on debt securities | (3) | (78) | | | Impairment write-downs | n/a | n/a | (10) | | Equity securities | \$ 35 | \$ (35) | \$ 143 | n/a Not applicable. ## Allowance for credit losses The following table provides a reconciliation of the opening balance to the closing balance of the ECL allowance under IFRS 9 for debt securities measured at FVOCI: | \$ millions, as at or for the year ended October 31 | **Stage 1** | **Stage 2** | **Stage 3** | **Total** | | :--- | :--- | :--- | :--- | :--- | | | **Collective provision 12-month ECL performing** | **Collective provision lifetime ECL performing** | **Collective and individual provision lifetime ECL credit-impaired $^{(1)}$** | | | **2019 Debt securities measured at FVOCI** | | | | | | Balance at beginning of year | \$ 15 | \$ 3 | \$ 5 | \$ 23 | | Provision for (reversal of) credit losses $^{(1)}$ | 4 | | | 4 | | Write-offs | | | (4) | (4) | | Other | (1) | | | (1) | | **Balance at end of year** | **\$ 14** | **\$ 3** | **\$ 6** | **\$ 23** | | **2018 Debt securities measured at FVOCI** | | | | | | Balance at beginning of year | \$ 14 | \$ 35 | \$ | \$ 49 | | Provision for (reversal of) credit losses $^{(1)}$ | 1 | (32) | 109 | 78 | | Write-offs | | | (5) | (5) | | Other | | | (99) $^{(2)}$ | (99) | | **Balance at end of year** | **\$ 15** | **\$ 3** | **\$ 5** | **\$ 23** | $^{(1)}$ Included in the gains (losses) from debt securities measured at FVOCI and amortized cost, net on our consolidated statement of income. $^{(2)}$ Includes ECL of \$99 million relating to Barbados debt securities that were derecognized in the fourth quarter of 2018 as a result of a debt restructuring agreement completed with the Government of Barbados. #### Barbados debt restructuring As a result of a comprehensive debt restructuring agreement completed with the Government of Barbados in the fourth quarter of 2018, which impacts Barbados dollar-denominated debt instruments and excludes U.S. dollar-denominated debt, we derecognized debt securities measured at FVOCI with a par value of \$467 million and expected credit losses of \$99 million, and derecognized loans measured at amortized cost with a par value of \$116 million and expected credit losses of \$48 million. In exchange for the securities and loans that were derecognized, we recognized longer-dated securities with a par value of \$522 million as originated credit-impaired amortized cost securities at a carrying value equal to the estimated fair value of \$375 million with no initial allowance for expected credit losses as risk of future losses was reflected in the acquisition date discount, and recognized shorter-dated securities with a par value of \$61 million as stage 1 amortized cost securities with expected credit losses of \$1 million. --- ## Note 5 Loans$^{(1)(2)}$ | \$ millions, as at October 31 | **2019** | **2018** | | :--- | :---: | :---: | | | **Gross amount** | **Stage 3 allowance** | **Stages 1 and 2 allowance** | **Total allowance $^{(3)}$** | **Net total** | **Gross amount** | **Stage 3 allowance** | **Stages 1 and 2 allowance** | **Total allowance** | **Net total** | | **Residential mortgages$^{(4)}$** | \$ 208,652 | \$ 140 | \$ 71 | \$ 211 | \$ 208,441 | \$ 207,749 | \$ 143 | \$ 71 | \$ 214 | \$ 207,535 | | **Personal** | 43,651 | 128 | 425 | 553 | 43,098 | 43,058 | 109 | 372 | 481 | 42,577 | | **Credit card** | 12,755 | | 420 | 420 | 12,335 | 12,673 | | 418 | 418 | 12,255 | | **Business and government $^{(4)}$** | 125,798 | 376 | 355 | 731 | 125,067 | 109,555 | 230 | 296 | 526 | 109,029 | | | **\$ 390,856** | **\$ 644** | **\$ 1,271** | **\$ 1,915** | **\$ 388,941** | **\$ 373,035** | **\$ 482** | **\$ 1,157** | **\$ 1,639** | **\$ 371,396** | $^{(1)}$ Loans are net of unearned income of \$469 million (2018: \$421 million). $^{(2)}$ Includes gross loans of \$69.5 billion (2018: \$61.0 billion) denominated in U.S. dollars and \$6.7 billion (2018: \$4.8 billion) denominated in other foreign currencies. $^{(3)}$ Includes ECL allowances for customers' liability under acceptances. $^{(4)}$ Includes \$60 million of residential mortgages (2018: \$12 million) and \$21,182 million of business and government loans (2018: \$16,424 million) that are measured at FVTPL. --- | Allowance for credit losses | **Stage 1** | **Stage 2** | **Stage 3** | **Total** | | :--- | :--- | :--- | :--- | :--- | | | **Collective provision 12-month ECL performing** | **Collective provision lifetime ECL performing** | **Collective and individual provision lifetime ECL credit-impaired $^{(1)}$** | | | **\$ millions, as at or for the year ended October 31** | | | | | | **2019 Debt securities measured at FVOCI** | | | | | | Balance at beginning of year | \$ 15 | \$ 3 | \$ 5 | \$ 23 | | Provision for (reversal of) credit losses $^{(3)}$ | 4 | | | 4 | | Write-offs | | | (4) | (4) | | Other | (1) | | | (1) | | **Balance at end of year** | **\$ 14** | **\$ 3** | **\$ 6** | **\$ 23** | | **2018 Debt securities measured at FVOCI** | | | | | | Balance at beginning of year | \$ 14 | \$ 35 | \$ | \$ 49 | | Provision for (reversal of) credit losses $^{(3)}$ | 1 | (32) | 109 | 78 | | Write-offs | | | (5) | (5) | | Other | | | (99) $^{(2)}$ | (99) | | **Balance at end of year** | **\$ 15** | **\$ 3** | **\$ 5** | **\$ 23** | $^{(1)}$ Includes the ECL allowance for purchased credit-impaired loans from the acquisition of The PrivateBank. $^{(2)}$ Transfers represent the amount of the ECL allowance at the beginning of the quarter in which the loan migration occurred. Net remeasurement represents the current period change in ECL allowances for transfers, net write-offs, changes in forecasts of forward-looking information, parameter updates, and partial repayments in the period. $^{(3)}$ Provision for (reversal of) credit losses for loans and undrawn credit facilities and other off-balance sheet exposures is presented as Provision for (reversal of) credit losses on our consolidated statement of income. $^{(4)}$ We generally continue to pursue collection on the amounts that were written off. The degree of collection efforts varies from one jurisdiction to another, depending on the local regulations and original agreements with customers. $^{(5)}$ See Note 4 for the ECL allowance on debt securities measured at FVOCI. The ECL allowances for other financial assets classified at amortized cost were immaterial as at October 31, 2019 and were excluded from the table above. Other financial assets classified at amortized cost are presented on our consolidated balance sheet net of ECL allowances. $^{(6)}$ Included in Other liabilities on our consolidated balance sheet. #### Inputs, assumptions and model techniques Our ECL allowances are estimated using complex models that incorporate inputs, assumptions and model techniques that involve a high degree of management judgment. In particular, the following ECL elements are subject to a high level of judgment that can have a significant impact on the level of ECL allowances provided: * Determining when a significant increase in credit risk of a loan has occurred; * Measuring both 12-month and lifetime credit losses; and CIBC 2019 ANNUAL REPORT 137 --- * Forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios. In addition, the interrelationship between these elements is also subject to a high degree of judgment which can also have a significant impact on the level of ECL recognized. #### Determining when a significant increase in credit risk has occurred The determination of whether a loan has experienced a significant increase in credit risk has a significant impact on the level of ECL allowance as loans that are in stage 1 are measured at 12-month ECL, while loans in stage 2 are measured at lifetime ECL. Migration of loans between stage 1 and stage 2 can cause significant volatility in the amount of the recognized ECL allowances and the provision for credit losses in a particular period. For the majority of our retail loan portfolios, we determine a significant increase in credit risk based on relative changes in the loan's lifetime PD since its initial recognition. The PDs used for this purpose are the expected value of our upside, downside and base case lifetime PDs. Significant judgment is involved in determining the upside, downside and base case lifetime PDs through the incorporation of forward-looking information into long run PDs, in determining the probability weightings of the scenarios, and in determining the relative change in PDs that are indicative of a significant increase in credit risk for our various retail products. Increases in the expected PDs or decreases in the thresholds for changes in PDs that are indicative of a significant increase in credit risk can cause significant migration of loans from stage 1 to stage 2, which in turn can cause a significant increase in the amount of ECL allowances recognized. In contrast, decreases in the expected PDs or increases in the thresholds for changes in PDs that are indicative of a significant increase in credit risk can cause significant migration of loans from stage 2 to stage 1. For the majority of our business and government loan portfolios, we determine a significant increase in credit risk based on relative changes in internal risk ratings since initial recognition. Significant judgment is involved in the determination of the internal risk ratings. Deterioration or improvement in the risk ratings or adjustments to the risk rating downgrade thresholds used to determine a significant increase in credit risk can cause significant migration of loans and securities between stage 1 and stage 2, which in turn can have a significant impact on the amount of ECL recognized. While potentially significant to the level of ECL allowances recognized, the thresholds for changes in PDs that are indicative of a significant increase in credit risk for our retail portfolios and the risk rating downgrade thresholds used to determine a significant increase in credit risk for our business and government loan portfolios are not expected to change frequently. All loans on which repayment of principal or payment of interest is contractually 30 days in arrears and all business and government loans that have migrated to the watch list are automatically migrated to stage 2 from stage 1. As at October 31, 2019, if the ECL for the stage 2 performing loans were measured using stage 1 ECL as opposed to lifetime ECL, the expected credit losses would be **\$305 million lower** than the total recognized IFRS 9 ECL on performing loans (2018: \$273 million). #### Measuring both 12-month and lifetime expected credit losses Our ECL models leverage the PD, LGD, and EAD parameters, as well as the portfolio segmentation used to calculate Basel expected loss regulatory adjustments for the portion of our retail and business and government portfolios under the advanced internal ratings-based (AIRB) approach. Adjustments are made to the Basel parameters to meet IFRS 9 requirements, including the conversion of through-the-cycle and downturn parameters used in the Basel regulatory calculations to point-in-time parameters used under IFRS 9 that consider forward-looking information. For standardized business and government portfolios, available long-run PDs, LGDs and EADs are also converted to point-in-time parameters through the incorporation of forward-looking information for the purpose of measuring ECL under IFRS 9. Significant judgment is involved in determining which forward-looking information variables are relevant for particular portfolios and in determining the extent by which through-the-cycle parameters should be adjusted for forward-looking information to determine point-in-time parameters. While changes in the set of forward-looking information variables used to convert through-the-cycle PDs, LGDs and EADs into point-in-time parameters can either increase or decrease ECL allowances in a particular period, changes to the mapping of forward-looking information variables to particular portfolios are expected to be infrequent. However, changes in the particular forward-looking information parameters used to quantify point-in-time parameters will be frequent as our forecasts are updated on a quarterly basis. Increases in the level of pessimism in the forward-looking information variables will cause increases in expected credit losses, while increases in the level of optimism in the forward-looking information variables will cause decreases in expected credit losses. These increases and decreases could be significant in any particular period and will start to occur in the period where our outlook of the future changes. With respect to the lifetime of a financial instrument, the maximum period considered when measuring ECL is the maximum contractual period over which we are exposed to credit risk. For revolving facilities, such as credit cards, the lifetime of a credit card account is the expected behavioural life. Significant judgment is involved in the estimate of the expected behavioural life. Increases in the expected behavioural life will increase the amount of ECL allowances, in particular for revolving loans in stage 2. #### Forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios As indicated above, forward-looking information is incorporated into both our assessment of whether the financial asset has experienced a significant increase in credit risk since its initial recognition and in our estimate of ECL. From analysis of historical data, our risk management function has identified and reflected in our ECL allowance those relevant forward-looking information variables that contribute to credit risk and losses within our retail and business and government loan portfolios. Within our retail loan portfolio, key forward-looking information variables include unemployment rates, housing prices and gross domestic product (GDP) growth. In many cases these variables are forecasted at the provincial level. Housing prices are also forecasted at the municipal level in some cases. Within our business and government loan portfolio, key drivers that impact the credit performance of the entire portfolio include S\&P 500 growth rates, business credit growth rates, unemployment rates and credit spreads, while forward-looking information variables such as commodity prices and mining activity are significant for certain portfolios. Our forecasting process leverages the process used prior to the adoption of IFRS 9. For the majority of our loan portfolios, our forecast of forward-looking information variables is established from a "base case" or most likely scenario that is used internally by management for planning and forecasting purposes. For most of the forward-looking information variables related to our Canadian businesses, we have forecast scenarios by province. In forming the "base case" scenario, we consider the forecasts of monetary authorities such as the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the Bank of Canada, as well as private sector economists. We then derive reasonably possible "upside case" and "downside case" scenarios using external forecasts that are above and below our "base case" and the application of management judgment. A probability weighting is assigned to our "base case", "upside case" and "downside case" scenarios based on management judgment. CIBC 2019 ANNUAL REPORT 139 --- The following table provides the base case, upside case and downside case scenario forecasts for select forward-looking information variables used to estimate our ECLs. The base case, upside case and downside case amounts shown represent the average value of the forecasts over the respective projection horizons. | As at October 31, 2019 | **Base case** | **Upside case** | **Downside case** | | :--- | :---: | :---: | :---: | | | **Average value over the next 12 months** | **Average value over the remaining forecast period** | **Average value over the next 12 months** | **Average value over the remaining forecast period** | **Average value over the next 12 months** | **Average value over the remaining forecast period** | | Canadian GDP year-over-year growth $^{(1)}$ | 1.5 % | 1.8% | 2.3 % | 2.5% | 0.6 % | 0.8 % | | Canadian unemployment rate $^{(1)}$ | 6.1% | 5.9% | 5.5% | 5.5% | 6.4% | 6.5% | | Canadian Housing Price Index growth $^{(1)}$ | 1.6% | 2.2% | 4.8% | 4.0% | (2.2)% | (0.8)% | | S\&P 500 Index growth rate | 5.0% | 4.7% | 8.2% | 6.6% | (3.7)% | (10.3)% | | West Texas Intermediate Oil Price (US\$) | \$ 60 | \$ 60 | \$ 67 | \$ 74 | \$ 47 | \$ 43 | | As at October 31, 2018 | **Base case** | **Upside case** | **Downside case** | | :--- | :---: | :---: | :---: | | | **Average value over the next 12 months** | **Average value over the remaining forecast period** | **Average value over the forecast period** | **Average value over the forecast period** | **Average value over the forecast period** | **Average value over the forecast period** | | Canadian GDP year-over-year growth $^{(1)}$ | 1.9% | 1.4% | 2.3% | 1.2% | | Canadian unemployment rate $^{(1)}$ | 5.8% | 6.0% | 5.3% | 6.4% | | Canadian Housing Price Index growth $^{(1)}$ | 2.2% | 2.3% | 6.4% | (1.2)% | | S\&P 500 Index growth rate | 4.6% | (1.4)% | 11.3% | (10.8)% | | West Texas Intermediate Oil Price (US\$) | \$ 67 | \$ 65 | \$ 78 | \$ 52 | $^{(1)}$ Federal-level forward-looking forecasts are presented in the table above, which represent the aggregation of the provincial-level forecasts used to estimate our ECL. Housing Price Index growth rates are also forecasted at the municipal level in some cases. As a result, the forecasts for individual provinces or municipalities reflected in our ECLs will differ from the federal forecasts presented above. The forecasting process is overseen by a governance committee consisting of internal stakeholders from across our bank including Risk Management, Economics, Finance and the impacted SBUs and involves a significant amount of judgment both in determining the forward-looking information forecasts for our various scenarios and in determining the probability weighting assigned to the scenarios. In general, a worsening of our outlook on forecasted forward-looking information for each scenario, an increase in the probability of the "downside case" scenario occurring, or a decrease in the probability of the "upside case" scenario occurring will increase the number of loans migrating from stage 1 to stage 2 and increase the estimated ECL allowance. In contrast, an improvement in our outlook on forecasted forward-looking information, an increase in the probability of the "upside case" scenario occurring, or a decrease in the probability of the "downside case" scenario occurring will have the opposite impact. It is not possible to meaningfully isolate the impact of changes in the various forward-looking information variables for a particular scenario because of both the interrelationship between the variables and the interrelationship between the level of pessimism inherent in a particular scenario and its probability of occurring. As indicated above, forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios involves a high degree of management judgment. If we were to only use our base case scenario for the measurement of ECL for our performing loans, our ECL allowance would be **\$63 million lower** than the recognized ECL as at October 31, 2019 (2018: \$45 million). If we were to only use our downside case scenario for the measurement of ECL for our performing loans, our ECL allowance would be **\$254 million higher** than the recognized ECL as at October 31, 2019 (2018: \$241 million). This sensitivity is isolated to the measurement of ECL and therefore did not consider changes in the migration of exposures between stage 1 and stage 2 from the determination of the significant increase in credit risk that would have resulted in a 100% base case scenario or a 100% downside scenario. Management overlays to ECL allowance estimates are adjustments which we use in circumstances where we judge that our existing inputs, assumptions and model techniques do not capture all relevant risk factors. The emergence of new macroeconomic, microeconomic or political events, along with expected changes to parameters, models or data that are not incorporated in our current parameters, internal risk rating migrations, or forward-looking information are examples of such circumstances. The use of management overlays requires the application of significant judgment that may impact the amount of ECL allowances recognized. 140 CIBC 2019 ANNUAL REPORT --- ## Loans$^{(1)}$ The following tables provide the gross carrying amount of loans, and the contractual amounts of undrawn credit facilities and other off-balance sheet exposures based on the application of our 12-month point in time PDs under IFRS 9 to our risk management PD bands for retail exposures, and based on our internal risk ratings for business and government exposures. Refer to "Credit risk" section of the MD&A for details on the CIBC risk categories. | Loans $^{(1)}$ | **2019** | | | | | **2018** | | | | | | :--- | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | | | **Stage 1** | **Stage 2** | **Stage 3 $^{(2)(3)(4)}$** | **Total** | **Net** | **Stage 1** | **Stage 2** | **Stage 3 $^{(2)(3)(4)}$** | **Total** | **Net** | | **Residential mortgages** | | | | | | | | | | | | Exceptionally low | \$ 142,260 | \$ | \$ | \$ 142,260 | \$ 141,556 | \$ | \$ | \$ 141,556 | | Very low | 37,140 | | | | 37,140 | 40,225 | | | | 40,225 | | Low | 17,315 | 1,010 | | 18,325 | 15,321 | | | | 16,119 | | Medium | 1,207 | 1,162 | | 2,369 | 859 | 798 | 4,905 | 6,562 | | High | 11 | 597 | 233 | 154 | 2,638 | 996 | | | 510 | 510 | | Default | 2,251 | | | | 2,251 | 2,163 | 249 | 167 | 2,579 | | Not rated | | | | | | | | | | | | **Gross residential mortgages $^{(5)(6)}$** | **200,184** | **7,717** | **751** | **208,652** | **200,124** | **6,948** | **677** | **207,749** | | **ECL allowance** | | | | **211** | | | | | **214** | | | **Net residential mortgages** | **200,156** | **7,674** | **611** | **208,441** | **200,097** | **6,904** | **534** | **207,535** | | **Personal** | | | | | | | | | | | | Exceptionally low | 24,258 | | | | 24,258 | 23,808 | | | | 23,808 | | Very low | 4,321 | 1,353 | | 5,674 | 3,813 | 1,374 | | 5,187 | | Low | 4,955 | 1,582 | | 6,537 | 5,954 | 702 | | 6,656 | | Medium | 3,703 | 1,611 | | 5,314 | 4,428 | 1,151 | | 5,579 | | High | 302 | 613 | | 915 | 245 | 691 | | 936 | | Default | 164 | | | 164 | 142 | | | 142 | | Not rated | 720 | 29 | 40 | 789 | 677 | 33 | 40 | 750 | | **Gross personal $^{(6)}$** | **38,259** | **5,188** | **204** | **43,651** | **38,925** | **3,951** | **182** | **43,058** | | **ECL allowance** | 160 | 265 | 128 | 553 | 176 | 196 | 109 | 481 | | **Net personal** | **38,099** | **4,923** | **76** | **43,098** | **38,749** | **3,755** | **73** | **42,577** | | **Credit card** | | | | | | | | | | | | Exceptionally low | 3,015 | | | 3,015 | 3,405 | | | 3,405 | | Very low | 1,142 | 83 | | 1,225 | 1,747 | 50 | | 1,797 | | Low | 5,619 | 274 | | 5,893 | 3,809 | 710 | | 4,519 | | Medium | 1,344 | 565 | | 1,909 | 1,011 | 1,241 | | 2,252 | | High | 10 | 538 | | 548 | 10 | 528 | | 538 | | Default | 158 | 7 | | 165 | 162 | | | 162 | | **Gross credit card** | **11,288** | **1,467** | **420** | **12,755** | **10,144** | **2,529** | **420** | **12,673** | | **ECL allowance** | 129 | 291 | 420 | 88 | 330 | 418 | | **Net credit card** | **11,159** | **1,176** | | **12,335** | **10,056** | **2,199** | | **12,255** | | **Business and government $^{(7)}$** | | | | | | | | | | | | Investment grade | 46,800 | 251 | | 47,051 | 42,993 | 221 | | 43,214 | | Non-investment grade | 80,780 | 3,443 | | 84,223 | 69,560 | 3,819 | | 73,379 | | Watchlist | 374 | 1,575 | | 1,949 | 279 | 1,201 | | 1,480 | | Default | 866 | | | 866 | 504 | | | 504 | | Not rated | 752 | 79 | 45 | 876 | 1,040 | 86 | 117 | 1,243 | | **Gross business and government $^{(5)(8)}$** | **128,706** | **5,348** | **911** | **134,965** | **113,872** | **5,327** | **621** | **119,820** | | **ECL allowance** | 209 | 146 | 376 | 731 | 159 | 137 | 230 | 526 | | **Net business and government** | **128,497** | **5,202** | **535** | **134,234** | **113,713** | **5,190** | **391** | **119,294** | | **Total net amount of loans** | **\$ 377,911** | **\$ 18,975** | **\$ 1,222** | **\$ 398,108** | **\$ 362,615** | **\$ 18,048** | **\$ 998** | **\$ 381,661** | $^{(1)}$ Other financial assets classified at amortized cost were excluded from the table above as their ECL allowances were immaterial as at October 31, 2019. In addition, the table excludes debt securities measured at FVOCI, for which ECL allowances of \$23 million (2018: \$23 million) were recognized in AOCI. $^{(2)}$ Includes purchased credit-impaired loans from the acquisition of The PrivateBank. $^{(3)}$ Excludes foreclosed assets of \$25 million (2018: \$14 million) which were included in Other assets on our consolidated balance sheet. $^{(4)}$ As at October 31, 2019, 90% (2018: 89%) of stage 3 impaired loans were either fully or partially collateralized. $^{(5)}$ Includes \$60 million (2018: \$12 million) of residential mortgages and \$21,182 million (2018: \$16,424 million) of business and government loans that are measured at FVTPL. $^{(6)}$ The internal risk rating grades presented for residential mortgages and certain personal loans do not take into account loan guarantees or insurance issued by the Canadian government (federal or provincial), Canadian government agencies, or private insurers, as the significant increase in credit risk of these loans is based on relative changes in the loans' lifetime PD without considering collateral or other credit enhancements. $^{(7)}$ Certain comparative information has been reclassified between internal risk rating categories. $^{(8)}$ Includes customers' liability under acceptances of \$9,167 million (2018: \$10,265 million). ### Purchased credit-impaired loans Purchased credit-impaired loans resulting from the acquisition of The PrivateBank include business and government and consumer loans with outstanding unpaid principal balances of \$8 million, \$20 million and \$134 million; and fair values of \$6 million, \$14 million, and \$105 million, respectively, as at October 31, 2019, October 31, 2018, and June 23, 2017 (the acquisition date). ### Loans contractually past due but not impaired This comprises loans where repayment of principal or payment of interest is contractually in arrears. The following table provides an aging analysis of the contractually past due loans: | \$ millions, as at October 31 | **Less than 31 days** | **31 to 90 days** | **Over 90 days** | **2019 Total** | **2018 Total** | | :--- | ---: | ---: | ---: | ---: | ---: | | Residential mortgages | \$ 2,608 | \$ 862 | \$ | \$ 3,470 | \$ 3,354 | | Personal | 763 | 185 | | 948 | 937 | | Credit card | 559 | 180 | 99 | 838 | 822 | | Business and government | 555 | 177 | | 732 | 683 | | | **\$ 4,485** | **\$ 1,404** | **\$ 99** | **\$ 5,988** | **\$ 5,796** | During the year, gross interest income that would have been recorded if impaired loans were treated as current was \$99 million (2018: \$81 million), of which \$46 million (2018: \$27 million) was in Canada and \$53 million (2018: \$54 million) was outside Canada. During the year, interest recognized on impaired loans was \$40 million (2018: \$23 million), and interest recognized on loans before being classified as impaired was \$58 million (2018: \$59 million), of which \$43 million (2018: \$41 million) was in Canada and \$15 million (2018: \$18 million) was outside Canada. ### Net interest income after provision for credit losses | \$ millions, for the year ended October 31 | **2019** | **2018** |