US Bank 2005 Annual Report Download - page 59

13.4 percent of consolidated net interest income, in 2004. CRITICAL ACCOUNTING POLICIES
The decline of $550 million reflected asset/liability The accounting and reporting policies of the Company
management decisions to borrow more in the capital comply with accounting principles generally accepted in the
markets, a higher interest rate environment and the United States and conform to general practices within the
reduction of net receive fixed swap positions as short-term banking industry. The preparation of financial statements in
rates have risen over the past eighteen months. conformity with generally accepted accounting principles
Noninterest expense decreased $170 million requires management to make estimates and assumptions.
(57.4 percent) in 2005, compared with 2004. The year- The financial position and results of operations can be
over-year decrease reflected a favorable change in the MSR affected by these estimates and assumptions, which are
valuation and lower debt prepayment charges, partially integral to understanding the Company’s financial
offset by higher personnel expenses. Noninterest expense in statements. Critical accounting policies are those policies
2005 included MSR reparation of $53 million, compared that management believes are the most important to the
with MSR impairment of $57 million in 2004. The change portrayal of the Company’s financial condition and results,
in MSR valuations was driven by higher interest rates and and require management to make estimates that are
declining prepayment speeds in 2005, compared with 2004. difficult, subjective or complex. Most accounting policies
Debt prepayment charges were $54 million in 2005, are not considered by management to be critical accounting
compared with $155 million in 2004. policies. Several factors are considered in determining
The provision for credit losses for this business unit whether or not a policy is critical in the preparation of
represents the residual aggregate of the net credit losses financial statements. These factors include, among other
allocated to the reportable business units and the things, whether the estimates are significant to the financial
Company’s recorded provision determined in accordance statements, the nature of the estimates, the ability to readily
with accounting principles generally accepted in the United validate the estimates with other information including
States. The provision for credit losses was a net recovery of third-parties or available prices, and sensitivity of the
$12 million in 2005, compared with $103 million in 2004. estimates to changes in economic conditions and whether
Refer to the ‘‘Corporate Risk Profile’’ section for further alternative accounting methods may be utilized under
information on the provision for credit losses, generally accepted accounting principles. Management has
nonperforming assets and factors considered by the discussed the development and the selection of critical
Company in assessing the credit quality of the loan accounting policies with the Company’s Audit Committee.
portfolio and establishing the allowance for credit losses. Significant accounting policies are discussed in Note 1
Income taxes are assessed to each line of business at a of the Notes to Consolidated Financial Statements. Those
managerial tax rate of 36.4 percent with the residual tax policies considered to be critical accounting policies are
expense or benefit to arrive at the consolidated effective tax described below.
rate included in Treasury and Corporate Support. The
Allowance for Credit Losses The allowance for credit losses
$234 million favorable change in income tax expense
is established to provide for probable losses inherent in the
reflected a consolidated effective tax rate of 31.7 percent in
Company’s credit portfolio. The methods utilized to
2005, compared with 32.5 percent in 2004. The decrease in
estimate the allowance for credit losses, key assumptions
the effective tax rate from 2004 primarily reflected higher
and quantitative and qualitative information considered by
tax exempt income from investment securities and insurance
management in determining the adequacy of the allowance
products and incremental tax credits generated from
for credit losses are discussed in the ‘‘Credit Risk
investments in affordable housing and similar tax-
Management’’ section.
advantaged projects.
Management’s evaluation of the adequacy of the
ACCOUNTING CHANGES allowance for credit losses is often the most critical of
accounting estimates for a banking institution. It is an
Note 2 of the Notes to Consolidated Financial Statements inherently subjective process impacted by many factors as
discusses accounting standards recently issued but not yet discussed throughout the Management’s Discussion and
required to be adopted and the expected impact of the Analysis section of the Annual Report. Although risk
changes in accounting standards. To the extent the adoption management practices, methodologies and other tools are
of new accounting standards affects the Company’s utilized to determine each element of the allowance, degrees
financial condition, results of operations or liquidity, the of imprecision exist in these measurement tools due in part
impacts are discussed in the applicable section(s) of the to subjective judgments involved and an inherent lagging of
Management’s Discussion and Analysis and the Notes to credit quality measurements relative to the stage of the
Consolidated Financial Statements. business cycle. Even determining the stage of the business
U.S. BANCORP 57