KeyBank 2006 Annual Report Download - page 72

As shown in the preceding table, the pro forma effect is calculated as
the after-tax difference between: (i) compensation expense included in
each year’s reported net income in accordance with the prospective
application transition provisions of SFAS No. 148, and (ii) compensation
expense that would have been recorded had all existing forms of stock-
based compensation been accounted for under the fair value method
of accounting.
MARKETING COSTS
Key expenses all marketing-related costs, including advertising costs,
as incurred.
ACCOUNTING PRONOUNCEMENTS
ADOPTED IN 2006
Employers’ accounting for defined benefit pension and other
postretirement plans. In September 2006, the FASB issued SFAS No.
158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans,” which requires an employer to recognize an asset
or liability for the overfunded or underfunded status, respectively, of
its defined benefit plans. The overfunded or underfunded status is to be
measured solely by the difference between the fair value of plan assets
and the projected benefit obligation. In addition, any change in a
plan’s funded status must be recognized in comprehensive income in
Second, prior to the adoption of SFAS No. 123R, Key recognized total
compensation cost for stock-based, mandatory deferred incentive
compensation awards in the plan year that the performance-related
services necessary to earn the awards were rendered. Effective January 1,
2006, Key began recognizing compensation cost for these awards using
the accelerated method of amortization over a period of approximately
four years (the current year performance period and three-year vesting
period, which starts generally in the first quarter following the performance
period). The impact of this change on Key’s earnings was not material.
Third, prior to the adoption of SFAS No. 123R, Key presented all tax
benefits of deductions resulting from the exercise of stock options or
the issuance of shares under other stock-based compensation programs
as operating cash flows in the statement of cash flow. SFAS No. 123R
requires the cash flows resulting from the tax benefits of deductions in
excess of the compensation cost recognized for stock-based awards to
be classified as financing cash flows.
Generally, employee stock options granted by Key become exercisable
at the rate of 33-1/3% per year beginning one year from their grant date,
and expire no later than ten years from their grant date. Key recognizes
stock-based compensation expense for stock options with graded vesting
using an accelerated method of amortization.
Key uses shares repurchased from time-to-time under a repurchase program
(treasury shares) for share issuances under all stock-based compensation
programs other than the discounted stock purchase plan. Shares issued
under the stock purchase plan are purchased on the open market.
SFAS No. 123R requires companies like Key that have used the intrinsic
value method to account for employee stock options as outlined in APB
No. 25 to provide pro forma disclosures of the net income and earnings
per share effect of accounting for stock options using the fair value
method. Management estimates the fair value of options granted using
the Black-Scholes option-pricing model as further described in Note 15
(“Stock-Based Compensation”), which begins on page 89. The pro
forma effect of applying the fair value method of accounting to all forms
of stock-based compensation (primarily stock options, restricted stock,
performance shares, discounted stock purchase plans and certain
deferred compensation-related awards) for the years ended December 31,
2005 and 2004, is shown in the following table and would, if recorded,
have been included in “personnel expense” on the income statement.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Year ended December 31,
in millions, except per share amounts 2005 2004
Net income, as reported $1,129 $954
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects:
Stock options expense 20 15
All other stock-based employee compensation expense 15 11
35 26
Deduct: Total stock-based employee compensation expense determined under
fair value-based method for all awards, net of related tax effects:
Stock options expense 21 21
All other stock-based employee compensation expense 15 11
36 32
Net income — proforma $1,128 $948
Per common share:
Net income $2.76 $2.32
Net income — proforma 2.76 2.31
Net income assuming dilution 2.73 2.30
Net income assuming dilution — pro forma 2.73 2.28
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