Fifth Third Bank 2012 Annual Report Download - page 94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
92 Fifth Third Bancorp
straight-line method over the lives of the related leases or useful
lives of the related assets, whichever is shorter. 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 in the
Consolidated Statements of Income as incurred.
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities
measured 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 or 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.
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 the net deferred tax asset or liability is
reported in other assets and 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 reflects 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. This analysis is performed on a
quarterly basis and includes an evaluation of all positive and
negative evidence to determine whether 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. Any interest and penalties incurred
in connection with income taxes are recorded as a component of
income tax expense in the Consolidated Financial Statements. For
additional information on income taxes, see Note 19.
Earnings Per Share
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, the exercise of dilutive stock-based awards and warrants and
the dilutive effect of the settlement of outstanding forward
contracts.
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. In testing goodwill for
impairment, U.S. GAAP permits the Bancorp to first assess
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events and circumstances, the
Bancorp determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing
the two-step impairment test would be unnecessary. However, if the
Bancorp concludes otherwise, it would then be required to perform
the first step (Step 1) of the goodwill impairment test, and continue
to the second step (Step 2), if necessary. Step 1 of the goodwill
impairment test 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, Step 2 of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any.