Capital One 2008 Annual Report Download - page 107

89
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109, (FIN 48). FIN 48 clarifies the accounting treatment for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of
adoption, the Company recorded a $29.7 million reduction in retained earnings.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement
No. 140, (SFAS 156). SFAS 156 amends SFAS 140, with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in certain situations prescribed by SFAS 156. All separately
recognized servicing assets and servicing liabilities are to be initially measured at fair value, if practicable, and SFAS 156 permits an
entity to choose either the amortization method or fair value measurement method for subsequent measurement methods for each class
of separately recognized servicing assets and servicing liabilities. SFAS 156 was effective as of the beginning of an entitys first fiscal
year that begins after September 15, 2006. The requirements for recognition and initial measurement of servicing assets and servicing
liabilities should be applied prospectively to all transactions after the effective date of this statement. As of January 1, 2007, the
Company has adopted SFAS 156 and elected to measure its servicing assets and servicing liabilities using the fair value measurement
method. The Company has identified mortgage servicing rights (MSRs) relating to residential mortgage loans as a single class of
servicing rights and has elected to apply fair value accounting to these MSRs. Presently, this class represents all of the Companys
material servicing rights. The adoption of SFAS 156 did not have a material impact on the consolidated earnings or financial position
of the Company.
In February 2006, the FASB SFAS No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements
No. 133 and 140, (SFAS 155). SFAS 155 amends SFAS 133, and SFAS 140. SFAS 155 resolves issues addressed in SFAS 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155
permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133,
establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, and amends SFAS 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal
year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on the consolidated earnings or
financial position of the Company.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) using the modified-
prospective-transition method. Under that transition method, compensation cost recognized during the year ended December 31, 2006
includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based
Compensation (SFAS 123) and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on
the grant-date fair valued estimated in accordance with the provisions of SFAS 123(R). The Company voluntarily adopted the expense
recognition provisions of SFAS 123, prospectively to all awards granted, modified, or settled after January 1, 2003. Prior to January 1,
2003, the Company applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations in accounting for its stock based compensation plans. Results for prior periods have not been restated.
The Company has two active stock-based compensation plans, one employee plan and one non-employee director plan, which are
described more fully in Note 9. Under these plans, the grants to retirement eligible associates continue to vest after the associate
retires. For awards granted prior to the adoption of SFAS 123(R), the Company had been and will continue to recognize the
compensation cost of those awards over the full vesting periods or up to the date of retirement.
As a result of adopting SFAS 123(R) on January 1, 2006, the Companys income before income taxes and net income for the year
ended December 31, 2006 are $35.3 million and $23.3 million lower, respectively, than if it had continued to account for share-based
compensation under SFAS 123. Basic and diluted earnings per share for 2006 would have been $7.87 and $7.69, respectively, if the
Company had not adopted SFAS 123(R), compared to reported basic and diluted earnings per share of $7.80 and $7.62, respectively.
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as
financing cash flows.