Fifth Third Bank 2004 Annual Report Download - page 46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44 Fifth Third Bancorp
purpose entities, or SPEs, for periods ending after December 15,
2003. Application by public enterprises, other than small business
issuers, for all other types of VIEs (i.e., non-SPEs) is required in
fi nancial statements for periods ending after March 15, 2004, with
earlier adoption permitted. The Bancorp early adopted the provi-
sions of FIN 46 on July 1, 2003. Through December 31, 2004
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 unconsoli-
dated asset-backed SPE was formed for the sole purpose of partici-
pating in the sale and subsequent lease-back transactions with the
Bancorp. Based on this credit recourse, the Bancorp is deemed to be
the primary benefi ciary 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, 2004, the outstanding balance of leased autos sold
was approximately $259 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 operat-
ing lease assets are now refl ected as a component of noninterest
income and depreciation expense is now refl ected as a component
of noninterest expense. The Bancorp also early adopted the provi-
sions of FIN 46 related to the consolidation of two wholly-owned
fi nance entities involved in the issuance of trust preferred securi-
ties. 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
preferred securities obligations to the junior subordinated deben-
ture obligations that exist between the Bancorp and the issuing
trust entities. See Note 14 for discussion of certain guarantees that
the Bancorp has provided for the benefi t of the wholly-owned issu-
ing trust entities related to their debt obligations.
In March 2004, the Securities and Exchange Commission
staff released Staff Accounting Bulletin (“SAB”) No. 105, “Applica-
tion of Accounting Principles to Loan Commitments.” This SAB
disallows the inclusion of expected future cash fl ows related to the
servicing of a loan in the determination of the fair value of a loan
commitment. Further, no other internally developed intangible
asset should be recorded as part of the loan commitment deriva-
tive. Recognition of intangible assets would only be appropriate
in a third-party transaction, such as a purchase of a loan commit-
ment or in a business combination. The SAB is effective for all
loan commitments entered into after March 31, 2004, but does
not require retroactive adoption for loan commitments entered
into on or before March 31, 2004. Adoption of this SAB did not
have a material effect on the Bancorp’s Consolidated Financial
Statements.
In March 2004, the Emerging Issues Task Force (“EITF”)
reached a consensus on Issue 03-1, “The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Invest-
ments.” The EITF reached a consensus on an other-than-temporary
impairment model for debt and equity securities accounted for
under SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and cost method investments. The
basic model developed to evaluate whether an investment within
the scope of Issue 03-1 is other-than-temporarily impaired involves
a three-step process including, determining whether an invest-
ment is impaired (fair value less than cost), evaluating whether the
impairment is other-than-temporary and, if other-than-temporary,
requiring recognition of an impairment loss equal to the difference
between the investment’s cost and its fair value. In September 2004,
the FASB issued Staff Position (“FSP”) No. EITF 03-01-1, “Effec-
tive Date of Paragraphs 10-20 of EITF 03-01.” This FSP delays
the effective date of the measurement and recognition guidance
contained in paragraphs 10-20 of Issue 03-01. The amount of any
other-than-temporary impairment that needs to be recognized in
the future will be dependent on market conditions, the occurrence
of certain events or changes in circumstances relative to an investee,
the Bancorp’s intent and ability to hold the impaired investments
at the time of the valuation and the measurement and recognition
guidance to be defi ned in a future FSP issuance.
In December 2003, the Accounting Standards Executive
Committee of the American Institute of Certifi ed Public Accoun-
tants issued Statement of Position (“SOP”) 03-3, “Accounting for
Certain Loans and Debt Securities Acquired in a Transfer.” SOP
03-3 addresses the accounting for certain acquired loans that
show evidence of credit deterioration since their origination (i.e.
impaired loans) and for which a loss is deemed probable of occur-
ring. SOP 03-3 requires acquired loans to be recorded at their fair
value, defi ned as the present value of future cash fl ows, including
interest income, to be recognized over the life of the loan. SOP
03-3 prohibits the carryover of an allowance for loan loss on certain
acquired loans within its scope. SOP 03-3 is effective for loans that
are acquired in fi scal years beginning after December 15, 2004.
The Bancorp will evaluate the applicability of this SOP for all
prospective loans acquired in fi scal years beginning after December
15, 2004. The Bancorp does not anticipate this Statement to have
a material effect on its Consolidated Financial Statements.