US Bank 2005 Annual Report Download - page 27

a portion of the Company’s long-term debt, costs related to follows guidance outlined in Statement of Financial
business initiatives and incremental expenses of $63 million Accounting Standards No. 87, ‘‘Employer’s Accounting for
due to the expansion of the Company’s European merchant Pension Plans,’’ and reflects the long-term nature of benefit
processing business. These increases were offset somewhat obligations and the investment horizon of plan assets. This
by a net reduction in MSR impairments of $152 million accounting guidance has the effect of reducing earnings
and lower merger and restructuring-related charges. volatility related to short-term changes in interest rates and
Compensation expense increased due to increases in salaries market valuations. Actuarial gains and losses include the
and stock-based compensation. The increase in salaries impact of plan amendments and various unrecognized gains
reflected business expansion of in-store branches, the and losses which are deferred and amortized over the future
expansion of the Company’s merchant acquiring business in service periods of active employees. The actuarially derived
Europe and other initiatives. Stock-based compensation was market-related value utilized to determine the expected
higher due to lower employee stock-award forfeitures return on plan assets is based on fair value adjusted for the
relative to prior years. Employee benefits increased difference between expected returns and actual performance
primarily as a result of higher payroll taxes and pension of plan assets. The unrealized difference between actual
expense. Marketing and business development increased due experience and expected returns is included in the
to corporate brand advertising and an increase in product actuarially derived market-related value ratably over a five-
marketing campaigns. Technology and communications year period. At September 30, 2005, the accumulated
expense was higher year-over-year, reflecting technology unrecognized gain approximated $206 million, compared
investments that increased software amortization and the with an accumulated unrecognized loss of approximately
write-off of capitalized software being replaced. Other $139 million at September 30, 2004. The impact to pension
expense increased in 2004, compared with 2003, related to expense of the unrecognized asset gains or losses will
higher fraud and operating losses, insurance costs, operating incrementally increase (decrease) pension costs in each year
costs associated with affordable housing investments and from 2006 to 2010, by approximately $30 million,
merchant processing costs for payment services products, $(3) million, $(21) million, $(13) million and $(9) million,
the result of the expansion of the payment processing respectively. This assumes that the performance of plan
business and increases in transaction volume year-over-year. assets equals the assumed LTROR. Actual results will vary
depending on the performance of plan assets and changes to
Pension Plans Because of the long-term nature of pension assumptions required in the future. Refer to Note 1 of the
plans, the administration and accounting for pensions is Notes to Consolidated Financial Statements for further
complex and can be impacted by several factors, including discussion of the Company’s accounting policies for pension
investment and funding policies, accounting methods and plans.
the plan’s actuarial assumptions. The Company and its In 2005, the Company recognized a pension cost of
Compensation Committee have an established process for $33 million compared with a pension cost of $9 million in
evaluating the plans, their performance and significant plan 2004 and pension credit of $24 million in 2003. The
assumptions, including the assumed discount rate and the $24 million increase in pension costs in 2005 was driven by
long-term rate of return (‘‘LTROR’’). At least annually, an recognition of deferred actuarial (gains) losses and the
independent consultant is engaged to assist the Company’s impact of a lower discount rate. In 2004, pension costs
Compensation Committee in evaluating plan objectives, increased by $33 million, compared with 2003, driven by a
funding policies and investment policies considering its recognition of deferred actuarial (gains) losses and the
long-term investment time horizon and asset allocation impact of a lower discount rate, partially offset by the
strategies. Note 18 of the Notes to Consolidated Financial benefit of higher investment income related to pension
Statements provides further information on funding contributions made in 2003.
practices, investment policies and asset allocation strategies. In 2006, the Company anticipates that pension costs
Periodic pension expense (or credits) includes service will increase by approximately $48 million. The increase
costs, interest costs based on the assumed discount rate, the will be primarily driven by the lower discount rate and
expected return on plan assets based on an actuarially amortization of unrecognized actuarial losses from prior
derived market-related value and amortization of actuarial years, accounting for approximately $12 million and
gains and losses. The Company’s pension accounting policy $39 million of the anticipated increase, respectively.
U.S. BANCORP 25