PNC Bank 2005 Annual Report Download - page 42

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We reflect changes in the value of equity management
investments in our results of operations. Market conditions
and actual performance of the companies that we invest in
could differ from these assumptions, resulting in lower
valuations that could reduce earnings in future periods.
Accordingly, the valuations may not represent amounts that
will ultimately be realized from these investments.
Lease Residuals
We provide financing for various types of equipment,
aircraft, energy and power systems, and rolling stock
through a variety of lease arrangements. Direct financing
leases are carried at the sum of lease payments and the
estimated residual value of the leased property, less
unearned income. Residual value insurance or guarantees by
governmental entities cover a significant portion of the
residual value. Residual values are subject to judgments as
to the value of the underlying equipment that can be
affected by changes in economic and market conditions and
the financial viability of the residual guarantors and
insurers. To the extent not guaranteed or assumed by a third
party, or otherwise insured against, we bear the risk of
ownership of the leased assets. This includes the risk that
the actual value of the leased assets at the end of the lease
term will be less than the residual value, which could result
in an impairment charge and reduce earnings in the future.
These residual values are reviewed for impairment no less
than on an annual basis. See Note 1 Accounting Policies in
the Notes To Consolidated Financial Statements in Item 8 of
this Report for additional information.
Goodwill
Goodwill arising from business acquisitions represents the
value attributable to unidentifiable intangible elements in
the business acquired. Most of our goodwill relates to value
inherent in the fund servicing, Retail Banking and Corporate
& Institutional Banking businesses. The value of this
goodwill is dependent upon our ability to provide quality,
cost effective services in the face of competition from other
market participants on a national and international basis. We
also rely upon continuing investments in processing
systems, the development of value-added service features,
and the ease of access to our services.
As such, goodwill value is supported ultimately by earnings,
which is driven by the volume of business transacted and,
for certain businesses, the market value of assets under
administration or for which processing services are
provided. Lower earnings resulting from a lack of growth or
our inability to deliver cost-effective services over sustained
periods can lead to impairment of goodwill, which could
result in a charge and reduced earnings in the future. At
least annually, management evaluates events or changes in
circumstances that may indicate impairment in the carrying
amount of goodwill. See Note 1 Accounting Policies and
Note 9 Goodwill and Other Intangible Assets in the Notes
To Consolidated Financial Statements in Item 8 of this
Report for additional information.
Revenue Recognition
We derive net interest and noninterest income from various
sources, including:
• Lending,
• Securities portfolio,
• Investment management and fund servicing,
• Customer deposits,
• Loan servicing,
• Brokerage services,
• Sale of loans and securities,
• Certain private equity activities, and
• Securities and derivatives trading activities
including foreign exchange.
We also earn fees and commissions from issuing loan
commitments, standby letters of credit and financial
guarantees, selling various insurance products, providing
treasury management services and mergers and acquisitions
advisory and related services and participating in certain
capital markets transactions.
The timing and amount of revenue that we recognize in any
period is dependent on estimates, judgments, assumptions,
and interpretation of contractual terms. Changes in these
factors can have a significant impact on revenue recognized
in any period due to changes in products, market conditions
or industry norms. See Note 1 Accounting Policies in the
Notes To Consolidated Financial Statements in Item 8 of
this Report for additional information.
Income Taxes
Because our ownership interest in BlackRock, as measured
by value, is less than 80%, federal tax law requires us to file
two consolidated federal income tax returns: one for PNC
and subsidiaries excluding the consolidated results of
BlackRock and its subsidiaries, and a second return solely
for BlackRock and its subsidiaries. We and our subsidiaries
also file state and local income tax returns in many
jurisdictions.
In the normal course of business, we and our subsidiaries
enter into transactions for which the tax treatment is unclear
or subject to varying interpretations. In addition, filing
requirements, methods of filing and the calculation of
taxable income in various state and local jurisdictions are
subject to differing interpretations.
We evaluate and assess the relative risks and merits of the
appropriate tax treatment of transactions, filing positions,
filing methods and taxable income calculations after
considering statutes, regulations, judicial precedent, and
other information, and maintain tax accruals consistent with
our evaluation of these relative risks and merits. The result
of our evaluation and assessment is by its nature an
estimate. We and our subsidiaries are routinely subject to
audit and challenges from taxing authorities. In the event we
resolve a challenge for an amount different than amounts
previously accrued, we will account for the difference in the
period in which we resolve the matter.
Our tax treatment of certain leasing transactions is currently
being challenged by the IRS, as described in greater detail in
Cross-Border Leases and Related Tax and Accounting
Matters in the Consolidated Balance Sheet Review section
of Item 7 of this Report.
Legal Contingencies
We are subject to a variety of legal and regulatory
proceedings and claims, including those described in Note 5
Legal Proceedings in the Notes To Consolidated Financial
Statements in Item 8 of this Report and others arising in the
normal course of our business. We review these matters
with internal and external legal counsel and establish
reserves when we determine that it is probable that a