Fifth Third Bank 2004 Annual Report Download - page 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42 Fifth Third Bancorp
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while acceler-
ated depreciation is used for income tax purposes. Amortization
of leasehold improvements is computed using the straight-line
method over the lives of the related leases or useful lives of the
related assets, whichever is shorter. In accordance with the adop-
tion of SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” the Bancorp tests its long-lived assets for
impairment through both a “probability-weighted” and “primary-
asset” approach whenever events or changes in circumstances
dictate. Maintenance, repairs and minor improvements are charged
to noninterest expense as incurred.
Operating Lease Equipment
Operating lease equipment is recorded at cost, net of accumulated
depreciation. Income from operating leases is recognized ratably
over the term of the leases and recorded within noninterest income
in the Consolidated Statements of Income. Depreciation expense
on operating lease equipment is recorded on a straight-line basis
over the term of the lease from the original cost of the asset to
the estimated residual value at the end of the lease term. Depre-
ciation expense is recorded within operating lease expense in the
Consolidated Statements of Income. The estimated residual value
of operating lease assets is periodically reviewed and, in the event
that the original estimated residual value is determined to be greater
than the asset’s estimated market value at the end of the lease term,
depreciation expense is adjusted prospectively.
Derivative Financial Instruments
The Bancorp accounts for its derivatives in accordance with SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. The Statement requires recognition of
all derivatives as either assets or liabilities in the balance sheet and
requires measurement of those instruments at fair value through
adjustments to either accumulated other comprehensive income
within shareholders’ equity or current earnings or both, as appro-
priate. On the date the Bancorp enters into a derivative contract,
the Bancorp designates the derivative instrument as either a fair
value hedge, cash fl ow hedge or as a free-standing derivative instru-
ment. For a fair value hedge, changes in the fair value of the deriva-
tive instrument and changes in the fair value of the hedged asset
or liability or of an unrecognized fi rm commitment attributable to
the hedged risk are recorded in current period net income. For a
cash fl ow hedge, changes in the fair value of the derivative instru-
ment, to the extent that it is effective, are recorded in accumulated
other comprehensive income and subsequently reclassifi ed to net
income in the same period(s) that the hedged transaction impacts
net income. For free-standing derivative instruments, changes in
fair values are reported in current period net income.
Prior to entering a hedge transaction, the Bancorp formally
documents the relationship between the hedging instruments and
hedged items, as well as the risk management objective and strategy
for undertaking various hedge transactions. This process includes
linking all derivative instruments that are designated as fair value or
cash fl ow hedges to specifi c assets and liabilities on the balance sheet
or to specifi c forecasted transactions along with a formal assessment
at both inception of the hedge and on an ongoing basis as to the
effectiveness of the derivative instrument in offsetting changes in
fair values or cash fl ows of the hedged item. If it is determined that
the derivative instrument is not highly effective as a hedge, hedge
accounting is discontinued and the adjustment to fair value of the
derivative instrument is recorded in net income.
Earnings Per Share
In accordance with SFAS No. 128, “Earnings Per Share,” basic
earnings per share are computed by dividing net income available
to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Earnings per
diluted share are computed by dividing adjusted net income avail-
able to common shareholders by the weighted-average number of
shares of common stock and common stock equivalents outstand-
ing during the period. Dilutive common stock equivalents repre-
sent the assumed conversion of convertible preferred stock and the
exercise of stock options.
Other
Securities and other property held by Fifth Third Investment Advi-
sors, a division of the Bancorp’s banking subsidiaries, in a fi duciary
or agency capacity are not included in the Consolidated Balance
Sheets because such items are not assets of the subsidiaries. Invest-
ment advisory revenue in the Consolidated Statements of Income
is recognized on the accrual basis. Investment advisory service reve-
nues are recognized monthly based on a fee charged per transaction
processed and a fee charged on the market value of ending account
balances associated with individual contracts.
The Bancorp recognizes revenue from its electronic payment
processing services on an accrual basis as such services are
performed, recording revenues net of certain costs (primarily inter-
change fees charged by credit card associations) not controlled by
the Bancorp.
Acquisitions of treasury stock are carried at cost. Reissuance of
shares in treasury for acquisitions, stock option exercises or other
corporate purposes is recorded based on the specifi c identifi cation
method.
New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, “Account-
ing for Stock-Based Compensation-Transition and Disclosure—an
Amendment of FASB Statement No. 123.” This Statement amends
SFAS No. 123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require more prominent disclo-
sures about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results
in both annual and interim fi nancial statements. This Statement
was effective for fi nancial statements for fi scal years ending after
December 15, 2002. Effective January 1, 2004, the Bancorp adopt-
ed the fair value recognition provisions of SFAS No. 123 using the
retroactive restatement method described in SFAS No. 148. As a
result, fi nancial information for all prior periods has been restated
to refl ect the compensation expense that would have been recog-
nized had the fair value method of accounting been applied to all
awards granted to employees after January 1, 1995.
The adoption of the retroactive restatement method resulted
in the restatement of previously reported balances of capital surplus,
retained earnings and deferred taxes. As of December 31, 2003,
previously reported capital surplus was increased by $633 million,
retained earnings were decreased by $529 million and deferred tax
assets were increased by $104 million. As of December 31, 2002,
previously reported capital surplus was increased by $530 million,
retained earnings were decreased by $439 million, and deferred
tax assets were increased by $91 million. In addition, in adopting
the fair value method of expense recognition, the Bancorp deter-
mined that in 2000 and 2001 certain outstanding stock options
exchanged in immaterial business combinations were omitted from
the determination of total purchase price and resulting goodwill.