KeyBank 2007 Annual Report Download - page 72

significant impact on Key’s financial condition or results of operations.
However, the adoption of the new accounting standard did prompt three
changes in Key’s accounting, as discussed below.
First, SFAS No. 123R changes the manner of accounting for forfeited
stock-based awards. Under the new standard, companies are no longer
permitted to account for forfeitures as they occur. Instead, companies must
now estimate expected forfeitures at the date the awards are granted and
record compensation expense only for those that are expected to vest. As
of the effective date, companies had to estimate expected forfeitures and
reduce their related compensation obligation for expense previously
recognized in the financial statements. The after-tax amount of this
reduction is presented on the income statement as a cumulative effect of
a change in accounting principle. Key’s cumulative after-tax adjustment
increased first quarter 2006 earnings by $5 million, or $.01 per diluted
common share.
Second, prior to the adoption of SFAS No. 123R, total compensation cost
for stock-based, mandatory deferred incentive compensation awards
was recognized in the plan year that the performance-related services
necessary to earn the awards were rendered. Effective January 1, 2006, Key
began recognizing compensation cost for these awards using the accelerated
method of amortization over a period of approximately four years (the
current year performance period and three-year vesting period, which starts
generally in the first quarter following the performance period). The
impact of this change on Key’s earnings was not material.
Third, prior to the adoption of SFAS No. 123R, Key presented all tax
benefits of deductions resulting from the exercise of stock options or the
issuance of shares under other stock-based compensation programs as
operating cash flows in the statement of cash flows. SFAS No. 123R
requires the cash flows resulting from the tax benefits of deductions in
excess of the compensation cost recognized for stock-based awards to
be classified as financing cash flows.
Generally, employee stock options granted by Key become exercisable
at the rate of 33-1/3% per year beginning one year from their grant date,
and expire no later than ten years from their grant date. Key recognizes
stock-based compensation expense for stock options with graded vesting
using an accelerated method of amortization.
Key uses shares repurchased under a repurchase program (treasury
shares) for share issuances under all stock-based compensation programs
other than the discounted stock purchase plan. Shares issued under the
stock purchase plan are purchased on the open market.
Prior to January 1, 2003, Key used the intrinsic value method to
account for employee stock options as outlined in Accounting Principles
Board (“APB”) No. 25. SFAS No. 123R requires companies that used
that method to provide pro forma disclosures of the net income and
earnings per share effect of accounting for stock options using the fair
value method. Management estimates the fair value of options granted
using the Black-Scholes option-pricing model as further described in Note
15 (“Stock-Based Compensation”), which begins on page 88. The pro
forma effect of applying the fair value method of accounting to all forms
of stock-based compensation (primarily stock options, restricted stock,
performance shares, discounted stock purchase plans and certain
deferred compensation-related awards) for the year ended December 31,
2005, is shown in the following table and would, if recorded, have been
included in “personnel expense” on the income statement.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Year ended December 31,
in millions, except per share amounts 2005
Net income, as reported $1,129
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects:
Stock options expense 20
All other stock-based employee compensation expense 15
35
Deduct: Total stock-based employee compensation expense determined under
fair value-based method for all awards, net of related tax effects:
Stock options expense 21
All other stock-based employee compensation expense 15
36
Net income — pro forma $1,128
Per common share:
Net income $2.76
Net income — pro forma 2.76
Net income assuming dilution 2.73
Net income assuming dilution — pro forma 2.73
As shown in the preceding table, the pro forma effect is calculated as the
after-tax difference between: (i) compensation expense included in reported
net income in accordance with the prospective application transition
provisions of SFAS No. 148, and (ii) compensation expense that would have
been recorded had all existing forms of stock-based compensation been
accounted for under the fair value method of accounting.