Wells Fargo 2007 Annual Report Download - page 81

78
Notes to Financial Statements
Wells Fargo & Company is a diversified financial services
company. We provide banking, insurance, investments, mort-
gage banking and consumer finance through banking stores,
the internet and other distribution channels to consumers,
businesses and institutions in all 50 states of the U.S. and in
other countries. In this Annual Report, when we refer to
“the Company,” “we,” “our” or “us” we mean Wells Fargo
& Company and Subsidiaries (consolidated). Wells Fargo &
Company (the Parent) is a financial holding company and a
bank holding company.
Our accounting and reporting policies conform with U.S.
generally accepted accounting principles (GAAP) and prac-
tices in the financial services industry. To prepare the finan-
cial statements in conformity with GAAP, management must
make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and income and expenses during the reporting
period. Management has made significant estimates in several
areas, including the allowance for credit losses (Note 6),
valuing residential mortgage servicing rights (MSRs) (Notes
8 and 9) and financial instruments (Note 17), pension
accounting (Note 20) and income taxes (Note 21). Actual
results could differ from those estimates.
In the Financial Statements and related Notes, all com-
mon share and per share disclosures reflect a two-for-one
stock split in the form of a 100% stock dividend distributed
August 11, 2006.
On January 1, 2007, we adopted the following new
accounting pronouncements:
• FIN 48 – Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109;
• FSP 13-2 – FASB Staff Position 13-2, Accounting for a
Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease
Transaction;
• FAS 155 – Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements
No. 133 and 140;
• FAS 157 – Fair Value Measurements; and
• FAS 159 – The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB
Statement No. 115.
The adoption of FIN 48, FAS 155, FAS 157 and FAS 159
did not have any effect on our financial statements at the
date of adoption. For additional information, see Note 17
and Note 21.
FSP 13-2 relates to the accounting for leveraged lease
transactions for which there have been cash flow estimate
changes based on when income tax benefits are recognized.
Certain of our leveraged lease transactions have been chal-
lenged by the Internal Revenue Service (IRS). We have paid
the IRS the contested income tax associated with these trans-
actions. However, we are continuing to vigorously defend
our initial filing position as to the timing of the tax benefits
associated with these transactions. Upon adoption of FSP
13-2, we recorded a cumulative effect of change in account-
ing principle to reduce the beginning balance of 2007
retained earnings by $71 million after tax ($115 million pre
tax). Since this adjustment changes only the timing of
income tax cash flows and not the total net income for these
leases, this amount will be recognized back into income over
the remaining terms of the affected leases.
On July 1, 2007, we adopted Emerging Issues Task Force
(EITF) Topic D-109, Determining the Nature of a Host
Contract Related to a Hybrid Financial Instrument Issued in
the Form of a Share under FASB Statement No. 133 (Topic
D-109), which provides clarifying guidance as to whether
certain hybrid financial instruments are more akin to debt or
equity, for purposes of evaluating whether the embedded
derivative financial instrument requires separate accounting
under FAS 133, Accounting for Derivative Instruments and
Hedging Activities. In accordance with the transition provi-
sions of Topic D-109, we transferred $1.2 billion of securi-
ties, consisting of investments in preferred stock callable by
the issuer, from trading assets to securities available for sale.
Because the securities were carried at fair value, the adoption
of Topic D-109 did not have any effect on our total stock-
holders’ equity.
IMMATERIAL ADJUSTMENTS
We obtained concurrence from the staff of the Securities
and Exchange Commission (the SEC) subsequent to the
filing of our third quarter 2007 Form 10-Q concerning our
accounting for the Visa restructuring transactions, including
judgment sharing agreements previously executed among
Wells Fargo, Visa Inc. and its predecessors (collectively Visa)
and certain other member banks of the Visa USA network.
We recorded an immaterial adjustment to the previously filed
2006 Statement of Income associated with indemnification
obligations related to agreements entered into during second
quarter 2006. Based on our proportionate membership share
of Visa USA, a litigation liability and corresponding expense
of $95 million was recorded for second quarter 2006, which
was included in Community Banking for management reporting.
This adjustment was estimated based upon our share of an
actual settlement reached in November 2007. The impact of
this adjustment to the 2006 Statement of Income was to
reduce net income by $62 million and diluted earnings per
share by $0.02.
In 2006 and 2005, our consolidated statement of cash
flows reflected mortgage servicing rights (MSRs) from securi-
tizations and asset transfers, as separately detailed in Note 9,
of $4,118 million and $2,652 million, respectively, as an
increase to cash flows from operating activities with a corre-
sponding decrease to cash flows from investing activities.
Note 1: Summary of Significant Accounting Policies