PNC Bank 2009 Annual Report Download - page 104

We purchase, as well as internally develop and customize,
certain software to enhance or perform internal business
functions. Software development costs incurred in the
planning and post-development project stages are charged to
noninterest expense. Costs associated with designing software
configuration and interfaces, installation, coding programs and
testing systems are capitalized and amortized using the
straight-line method over periods ranging from one to seven
years.
R
EPURCHASE A ND R ESALE A GREEMENTS
Generally, repurchase and resale agreements are treated as
collateralized financing transactions and are carried at the
amounts at which the securities will be subsequently
reacquired or resold, including accrued interest, as specified in
the respective agreements. Our policy is to take possession of
securities purchased under agreements to resell. We monitor
the market value of securities to be repurchased and resold
and additional collateral may be obtained where considered
appropriate to protect against credit exposure.
We have elected to account for structured resale agreements at
fair value. The fair value for structured resale agreements is
determined using a model which includes observable market
data as inputs.
O THER C OMPREHENSIVE I NCOME
Other comprehensive income consists, on an after-tax basis,
primarily of unrealized gains or losses on investment
securities classified as available for sale and derivatives
designated as cash flow hedges, and changes in pension, other
postretirement and postemployment benefit plan liability
adjustments. Details of each component are included in Note
20 Other Comprehensive Income.
T REASURY S TOCK
We record common stock purchased for treasury at cost. At
the date of subsequent reissue, the treasury stock account is
reduced by the cost of such stock on the first-in, first-out
basis.
D ERIVATIVE I NSTRUMENTS A ND H EDGING A CTIVITIES
We use a variety of financial derivatives as part of our overall
asset and liability risk management process to help manage
interest rate, market and credit risk inherent in our business
activities. Interest rate and total return swaps, swaptions,
interest rate caps and floors and futures contracts are the
primary instruments we use for interest rate risk management.
Financial derivatives involve, to varying degrees, interest rate,
market and credit risk. We manage these risks as part of our
asset and liability management process and through credit
policies and procedures. We seek to minimize counterparty
credit risk by entering into transactions with only high-quality
institutions, establishing credit limits, and generally requiring
bilateral netting and collateral agreements.
We recognize all derivative instruments at fair value as either
other assets or other liabilities on the Consolidated Balance
Sheet. Adjustments for counterparty credit risk are included in
the determination of their fair value. The accounting for
changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a
hedging relationship. For derivatives not designated as an
accounting hedge, changes in fair value are recognized in
noninterest income.
We utilize a net presentation for derivative instruments on the
Consolidated Balance Sheet taking into consideration the
effects of legally enforceable master netting agreements. Cash
collateral exchanged with counterparties is also netted against
the applicable derivative exposures by offsetting obligations to
return or rights to reclaim cash collateral against the fair
values of the net derivatives being collateralized.
For those derivative instruments that are designated and
qualify as accounting hedges, we must designate the hedging
instrument, based on the exposure being hedged, as either a
fair value hedge or a cash flow hedge. We have no derivatives
that hedge the net investment in a foreign operation.
We formally document the relationship between the hedging
instruments and hedged items, as well as the risk management
objective and strategy, before undertaking an accounting
hedge. To qualify for hedge accounting, the derivatives and
related hedged items must be designated as a hedge at
inception of the hedge relationship. For accounting hedge
relationships, we formally assess, both at the inception of the
hedge and on an ongoing basis, if the derivatives are highly
effective in offsetting designated changes in the fair value or
cash flows of the hedged item. If it is determined that the
derivative instrument is not highly effective, hedge accounting
is discontinued.
For derivatives that are designated as fair value hedges (i.e.,
hedging the exposure to changes in the fair value of an asset
or a liability attributable to a particular risk), changes in the
fair value of the hedging instrument are recognized in earnings
and offset by recognizing changes in the fair value of the
hedged item attributable to the hedged risk. To the extent the
change in fair value of the derivative does not offset the
change in fair value of the hedged item, the difference or
ineffectiveness is reflected in the income statement in the
same financial statement category as the hedged item.
For derivatives designated as cash flow hedges (i.e., hedging
the exposure to variability in expected future cash flows), the
effective portions of the gain or loss on derivatives are
reported as a component of accumulated other comprehensive
income (loss) and subsequently reclassified to interest income
in the same period or periods during which the hedged
transaction affects earnings. The change in fair value of any
ineffective portion of the hedging instrument is recognized
immediately in noninterest income.
100