Fifth Third Bank 2005 Annual Report Download - page 60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
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Temporary Impairment and Its Application to Certain
Investments.” 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. In September 2004, the FASB issued Staff Position
(“FSP”) No. EITF 03-01-1, “Effective Date of Paragraphs 10-20
of EITF 03-01.” This FSP delayed the effective date of the
measurement and recognition guidance contained in paragraphs
10-20 of Issue 03-01. In November 2005, the FASB issued FSP
FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain
Investments.” This FSP nullifies certain requirements of Issue 03-1
and supersedes EITF Abstracts, Topic No. D-44, “Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value.” Based on the
clarification provided in FSP FAS 115-1 and FAS 124-1, the
amount of any other-than-temporary impairment that needs to be
recognized will continue to be dependent on market conditions,
the occurrence of certain events or changes in circumstances
relative to an investee and an entity’s intent and ability to hold the
impaired investment at the time of the valuation. FSP FAS 115-1
and FAS 124-1 is effective for reporting periods beginning after
December 15, 2005. Adoption of this FSP did not have a material
effect on the Bancorp’s Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections-a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.” This Statement replaces APB
Opinion No. 20, “Accounting Changes,” and FASB Statement No.
3, “Reporting Accounting Changes in Interim Financial
Statements,” and changes the requirements for the accounting for
and reporting of a change in accounting principle. This Statement
requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. This Statement applies to all
voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. This Statement is effective for accounting
changes and error corrections made in fiscal years beginning after
December 15, 2005. The adoption of this Statement is not
expected to have a material effect on the Bancorp’s Consolidated
Financial Statements.
In July 2005, the FASB released a proposed Staff Position
(“FSP”) FAS 13-a, “Accounting for a Change or Projected Change
in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leveraged Lease Transaction,” which addresses the
accounting for a change or projected change in the timing of lessor
cash flows, but not the total net income, relating to income taxes
generated by a leveraged lease transaction. This proposed FSP
would amend SFAS No. 13, “Accounting for Leases,” and would
apply to all transactions classified as leveraged leases. The timing of
cash flows relating to income taxes generated by a leveraged lease is
an important assumption that affects the periodic income
recognized by the lessor. Under the proposed FSP, if during the
lease term the expected timing of the income tax cash flows
generated by a leveraged lease is revised, the rate of return and the
allocation of income would be recalculated from the inception of
the lease. Upon adoption of the proposed FSP, the change in the
net investment balance resulting from the recalculation would be
recognized as a cumulative effect of a change in accounting
principle. On an ongoing basis following the adoption, a change in
the net investment balance resulting from a recalculation would be
recognized as a gain or a loss in the period in which the assumption
changed and included in income from continuing operations in the
same line item used when leveraged lease income is recognized.
These amounts would then be recognized back into income over
the remaining terms of the affected leases. During May 2005, the
Bancorp filed suit in the United States District Court for the
Southern District of Ohio related to a dispute with the Internal
Revenue Service concerning the timing of deductions associated
with certain leveraged lease transactions in its 1997 tax return. The
Internal Revenue Service has also proposed adjustments to the tax
effects of certain leveraged lease transactions in subsequent tax
return years. The proposed adjustments relate to the Bancorp’s
portfolio of lease-in lease-out transactions, service contract leases
and qualified technology equipment leases with both domestic and
foreign municipalities. The Bancorp is challenging the Internal
Revenue Service’s proposed treatment of all of these leasing
transactions. The Bancorp’s original net investment in these leases
totaled approximately $900 million. The Bancorp continues to
believe that its treatment of these leveraged leases was appropriate
and in compliance with applicable tax law and regulations. While
management cannot predict with certainty the result of the suit,
given the tax treatment of these transactions has been challenged
by the Internal Revenue Service, the Bancorp believes a resolution
may involve a projected change in the timing of these leveraged
lease cash flows. Accordingly, while a change in the projected
timing of cash flows, excluding interest assessments, pursuant to
the currently applicable literature under SFAS No. 13 would not
impact cumulative income recognized, this proposed amendment
to SFAS No. 13 in its current form would impact the timing of
cumulative income recognized. In December 2005, the effective
date of the proposed Exposure Draft was delayed from its original
effective date as of the end of the first fiscal year ending after
December 15, 2005. Although the FSP has not yet been finalized,
the Bancorp is currently in the process of evaluating the potential
impact on its Consolidated Financial Statements.
In July 2005, the FASB released an Exposure Draft of a
proposed interpretation, “Accounting for Uncertain Tax Positions
– an Interpretation of FASB Statement 109.” The Exposure Draft
contains proposed guidance on the recognition and measurement
of uncertain tax positions. Any initial de-recognition amounts will
be reported as a cumulative effect of a change in accounting
principle. In October 2005, the effective date of the Exposure
Draft was delayed and in January 2006, the FASB staff concluded it
will be effective as of the beginning of the first annual period
beginning after December 15, 2006. A final Interpretation is
expected to be issued during the first quarter of 2006. The
Bancorp has not yet evaluated the potential impact of the
Exposure Draft on its Consolidated Financial Statements.
In August 2005, the FASB issued an Exposure Draft,
“Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140.” This Exposure Draft would amend
FASB Statement No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities,” and would
require that all separately recognized servicing rights be initially
measured at fair value, if practicable. For each class of separately
recognized servicing assets and liabilities, this Exposure Draft
would permit the Bancorp to choose either to report servicing
assets and liabilities at fair value or at amortized cost. Under the
fair value approach, servicing assets and liabilities will be recorded
at fair value at each reporting date with changes in fair value
recorded in earnings in the period in which the changes occur.
Under the amortized cost method, servicing assets and liabilities
are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are assessed for
impairment based on fair value at each reporting date. In
November 2005, the FASB announced the effective date of the
Exposure Draft had been delayed and would be effective for fiscal
years beginning after September 15, 2006. The Bancorp is
currently in the process of determining which methodology to use
to value recognized servicing assets and liabilities and therefore has
not yet determined the potential impact of the Exposure Draft on
its Consolidated Financial Statements.