Fifth Third Bank 2010 Annual Report Download - page 78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
76 Fifth Third Bancorp
Earnings Per Share
In accordance with U.S. GAAP, basic earnings per share is
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 is 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 dilutive
convertible preferred stock and the exercise of dilutive stock-
based awards and warrants.
The Bancorp calculates earnings per share pursuant to the
two-class method. The two-class method is an earnings allocation
formula that determines earnings per share separately for common
stock and participating securities according to dividends declared
and participation rights in undistributed earnings. For purposes of
calculating earnings per share under the two-class method,
restricted shares that contain nonforfeitable rights to dividends are
considered participating securities until vested. While the
dividends declared per share on such restricted shares are the
same as dividends declared per common share outstanding, the
dividends recognized on such restricted shares may be less
because dividends paid on restricted shares that are expected to be
forfeited are reclassified to compensation expense during the
period when forfeiture is expected.
Goodwill
Business combinations entered into by the Bancorp typically
include the acquisition of goodwill. U.S. GAAP requires goodwill
to be tested for impairment at the Bancorp’s reporting unit level
on an annual basis, which for the Bancorp is September 30, and
more frequently if events or circumstances indicate that there may
be impairment. The Bancorp has determined that its segments
qualify as reporting units under U.S. GAAP. Impairment exists
when a reporting unit’s carrying amount of goodwill exceeds its
implied fair value, which is determined through a two-step
impairment test. The first step (Step 1) compares the fair value of
a reporting unit with its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value,
the second step (Step 2) of the goodwill impairment test is
performed to measure the impairment loss amount, if any.
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction
between market participants at the measurement date. Since none
of the Bancorp’s reporting units are publicly traded, individual
reporting unit fair value determinations cannot be directly
correlated to the Bancorp’s stock price. To determine the fair
value of a reporting unit, the Bancorp employs an income-based
approach, utilizing the reporting unit’s forecasted cash flows
(including a terminal value approach to estimate cash flows
beyond the final year of the forecast) and the reporting unit’s
estimated cost of equity as the discount rate. Additionally, the
Bancorp determines its market capitalization based on the average
of the closing price of the Bancorp’s stock during the month
including the measurement date, incorporating an additional
control premium, and allocates this market-based fair value
measurement to the Bancorp’s reporting units in order to
corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the
implied fair value, an impairment loss equal to that excess amount
is recognized. An impairment loss recognized cannot exceed the
carrying amount of that goodwill and cannot be reversed even if
the fair value of the reporting unit recovers.
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination. The excess of
the fair value of the reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. This
assignment process is only performed for purposes of testing
goodwill for impairment. The Bancorp does not adjust the
carrying values of recognized assets or liabilities (other than
goodwill, if appropriate), nor recognize previously unrecognized
intangible assets in the Consolidated Financial Statements as a
result of this assignment process. Refer to Note 10 for further
information regarding the Bancorp’s goodwill.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiary, 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 average account balances
associated with individual contracts.
The Bancorp recognizes revenue from its card and
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.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. The Bancorp
records these BOLI policies within other assets in the
Consolidated Balance Sheets at each policy’s respective cash
surrender value, with changes recorded in other noninterest
income in the Consolidated Statements of Income.
Other intangible assets consist of core deposit intangibles,
customer lists, non-competition agreements and cardholder
relationships. Other intangibles are amortized on either a straight-
line or an accelerated basis over their useful lives. The Bancorp
reviews other intangible assets for impairment whenever events or
changes in circumstances indicate that carrying amounts may not
be recoverable.
Securities sold under repurchase agreements are accounted
for as collateralized financing transactions and included in other
short-term borrowings in the Consolidated Balance Sheets at the
amounts which the securities were sold plus accrued interest.
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.
Accounting and Reporting Developments
Transfers of Financial Assets
In June 2009, the FASB issued guidance amending the accounting
for the transfers of financial assets. This amended guidance
removed the concept of a QSPE, changed the requirements for
derecognizing financial assets and measuring gains or losses on
the sale of financial assets, and required additional disclosures
about transfers of financial assets and a transferor’s continuing
involvement in transferred financial assets. The amended guidance
was adopted by the Bancorp on January 1, 2010 on a prospective
basis and may impact the Bancorp’s structuring of securitizations
and other transfers of financial assets, including guaranteed