Fifth Third Bank 2003 Annual Report Download - page 27

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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reporting for derivative instruments, including certain embedded
derivatives, and for hedging activities under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.”
This Statement amends SFAS No. 133 to reflect the decisions made
as part of the Derivatives Implementation Group (DIG) and in
other FASB projects or deliberations. SFAS No. 149 was effective
for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. Adoption of
this Standard did not have a material effect on the Bancorp’s
Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity.” This Statement establishes standards for how
an entity classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement requires
that an issuer classify a financial instrument that is within its scope
as a liability. Many of those instruments were previously classified as
equity or in some cases presented between the liabilities section and
the equity section of the statement of financial position. This
Statement was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective at the
beginning of the first interim period beginning after June 15, 2003.
Adoption of this Standard on July 1, 2003 required a reclassification
of a minority interest to long-term debt and its corresponding
minority interest expense to interest expense, relating to preferred
stock issued during 2001 by a subsidiary of the Bancorp. The
existence of the mandatory redemption feature of this issue upon its
mandatory conversion to trust preferred securities necessitated these
reclassifications and did not result in any change in bottom line
income statement trends.
In December 2003, the FASB issued SFAS No. 132 (Revised
2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits.” This Statement expands upon the existing
disclosure requirements as prescribed under the original SFAS No.
132 by requiring more details about pension plan assets, benefit
obligations, cash flows, benefit costs and related information. SFAS
No. 132(R) also requires companies to disclose various elements of
pension and postretirement benefit costs in interim-period financial
statements beginning after December 15, 2003. This Statement is
effective for financial statements with fiscal years ending after
December 15, 2003. The Bancorp adopted this Standard and all of
its required disclosures are included in Note 24.
In November 2002, the FASB issued Interpretation No. 45, (FIN
45) “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,”
which elaborates on the disclosures to be made by a guarantor about
its obligations under certain guarantees issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Interpretation expands on the accounting guidance of
SFAS No. 5, “Accounting for Contingencies,” SFAS No. 57, “Related
Party Disclosures,” and SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments.” It also incorporates without change the
provisions of FASB Interpretation No. 34, “Disclosure of Indirect
Guarantees of Indebtedness of Others,” which is superseded. The initial
recognition and measurement provisions of this Interpretation apply on
a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements in this Interpretation were effective
for periods ending after December 15, 2002. Significant guarantees
that have been entered into by the Bancorp are disclosed in Note
15. Adoption of this Interpretation did not have a material effect
on the Bancorp’s Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN
46), “Consolidation of Variable Interest Entities.” This
Interpretation clarifies the application of ARB No. 51,
“Consolidated Financial Statements,” for certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
support from other parties. This Interpretation requires variable
interest entities (VIE’s) to be consolidated by the primary
beneficiary which represents the enterprise that will absorb the
majority of the VIE’s expected losses if they occur, receive a
majority of the VIE’s residual returns if they occur, or both.
Qualifying Special Purpose Entities (QSPE) are exempt from the
consolidation requirements of FIN 46. This Interpretation was
effective for VIE’s created after January 31, 2003 and for VIE’s in
which an enterprise obtains an interest after that date. In December
2003, the FASB issued Staff Interpretation No. 46R (FIN 46R),
“Consolidation of Variable Interest Entities — an interpretation of
ARB 51 (revised December 2003),” which replaces FIN 46. FIN
46R was primarily issued to clarify the required accounting for
interests in VIE’s. Additionally, this Interpretation exempts certain
entities from its requirements and provides for special effective dates
for enterprises that have fully or partially applied FIN 46 as of
December 24, 2003. Application of FIN 46R is required in
financial statements of public enterprises that have interests in
structures that are commonly referred to as special-purpose entities,
or SPE’s, for periods ending after December 15, 2003. Application
by public enterprises, other than small business issuers, for all other
types of VIE’s (i.e., non-SPE’s) is required in financial statements
for periods ending after March 15, 2004, with earlier adoption
permitted. The Bancorp early adopted the provisions of FIN 46 on
July 1, 2003. Through December 31, 2003 the Bancorp has
provided full credit recourse to an unrelated and unconsolidated
asset-backed SPE in conjunction with the sale and subsequent
leaseback of leased autos. The unrelated and unconsolidated asset-
backed SPE was formed for the sole purpose of participating in the
sale and subsequent lease-back transactions with the Bancorp. Based
on this credit recourse, the Bancorp is deemed to be the primary
beneficiary as it maintains the majority of the variable interests in
this SPE and was therefore required to consolidate the entity. Early
adoption of this Interpretation required the Bancorp to consolidate
these operating lease assets and a corresponding liability as well as
recognize an after-tax cumulative effect charge of $11 million ($.02
per diluted share) representing the difference between the carrying
value of the leased autos sold and the carrying value of the newly
consolidated obligation as of July 1, 2003. As of December 31,
2003, the outstanding balance of leased autos sold was
approximately $767 million. Consolidation of these operating lease
assets did not impact risk-based capital ratios or bottom line income
statement trends; however lease payments on the operating lease
assets are now reflected as a component of other operating income
and depreciation expense is now reflected as a component of
operating expenses. The Bancorp also early adopted the provisions
of FIN 46 related to the consolidation of two wholly-owned finance
entities involved in the issuance of trust preferred securities.
Effective July 1, 2003, the Bancorp deconsolidated the wholly-
owned issuing trust entities resulting in a recharacterization of the
underlying consolidated debt obligation from the previous trust