Fifth Third Bank 2006 Annual Report Download - page 58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
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reserve for any probable impairment in the portfolio. For
purposes of measuring impairment, the mortgage servicing rights
are stratified based on the financial asset type and interest rates. In
addition, the Bancorp obtains an independent third-party
valuation of the mortgage servicing portfolio on a quarterly basis.
Fees received for servicing loans owned by investors are based on
a percentage of the outstanding monthly principal balance of such
loans and are included in noninterest income as loan payments are
received. Costs of servicing loans are charged to expense as
incurred.
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
accelerated 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
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.
Derivative Financial Instruments
The Bancorp accounts for its derivatives under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,”
as amended. This 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 accumulated other comprehensive income and/or
current earnings, as appropriate. On the date the Bancorp enters
into a derivative contract, the Bancorp designates the derivative
instrument as either a fair value hedge, cash flow hedge or as a
free-standing derivative instrument. For a fair value hedge,
changes in the fair value of the derivative instrument and changes
in the fair value of the hedged asset or liability or of an
unrecognized firm commitment attributable to the hedged risk are
recorded in current period net income. For a cash flow hedge,
changes in the fair value of the derivative instrument, to the extent
that it is effective, are recorded in accumulated other
comprehensive income and subsequently reclassified 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 into a hedge transaction, the Bancorp
formally documents the relationship between 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 flow hedges to specific assets and liabilities on
the balance sheet or to specific 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 flows 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.
Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income,
tax credits and the applicable statutory tax rates expected for the
full year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in accrued taxes,
interest and expenses in the Consolidated Balance Sheets. Under
this method, the net deferred tax asset or liability is based on the
tax effects of the differences between the book and tax basis of
assets and liabilities, and recognizes enacted changes in tax rates
and laws. Deferred tax assets are recognized to the extent they
exist and are subject to a valuation allowance based on
management’s judgment that realization is more-likely-than-not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these
relative risks and merits. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by taxing
authorities and changes to statutory, judicial and regulatory
guidance that impact the relative risks of tax positions. These
changes, when they occur, can affect deferred taxes and accrued
taxes as well as the current period’s income tax expense and can
be significant to the operating results of the Bancorp. As
described in greater detail in Note 13, the Internal Revenue
Service is currently challenging the Bancorp’s tax treatment of
certain leasing transactions. For additional information, see Note
21.
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
available to common shareholders by the weighted-average
number of shares of common stock and common stock
equivalents outstanding during the period. Dilutive common stock
equivalents represent the assumed conversion of convertible
preferred stock and the exercise of stock-based awards.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiaries, in a
fiduciary or agency capacity are not included in the Consolidated
Balance Sheets because such items are not assets of the
subsidiaries. Investment advisory revenue in the Consolidated
Statements of Income is recognized on the accrual basis.
Investment advisory service revenues are recognized monthly
based on a fee charged per transaction processed and/or 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
interchange 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, exercises of stock-based
awards or other corporate purposes is recorded based on the
specific identification method.
Advertising costs are generally expensed as incurred.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 148, “Accounting for Stock-Based