KeyBank 2008 Annual Report Download - page 85

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Generally, nonrecurring valuation is the result of applying other
accounting pronouncements that require assets or liabilities to be
assessed for impairment or recorded at the lower of cost or fair value.
The fair value of assets or liabilities transferred in or out of Level 3 is
measured on the transfer date, with any additional changes in fair
value subsequent to the transfer considered to be realized or unrealized
gains or losses.
Additional information regarding fair value measurements and Key’s
adoption of SFAS No. 157 is provided in Note 20 (“Fair Value
Measurements”), which begins on page 118, and under the heading
“Accounting Pronouncements Adopted in 2008” below.
REVENUE RECOGNITION
Key recognizes revenues as they are earned based on contractual terms,
as transactions occur, or as services are provided and collectibility is
reasonably assured. Key’s principal source of revenue is interest income.
This revenue is recognized on an accrual basis primarily according to
nondiscretionaryformulas in written contracts such as loan agreements
or securities contracts.
STOCK-BASED COMPENSATION
Effective January 1, 2006, Key adopted SFAS No. 123R, “Share-Based
Payment,” which requires stock-based compensation to be measured
using the fair value method of accounting and the measured cost to be
recognized over the period during which the recipient is required to
provide service in exchange for the award. As of the effective date, Key
did not have any nonvested awards outstanding that had not previously
been accounted for using the fair value method. Consequently, the
adoption of SFAS No. 123R did not have a significant impact on Key’s
financial condition or results of operations. However, the adoption of
the new accounting standard did prompt three changes in Key’s
accounting, as discussed below.
First, SFAS No. 123R changes the manner of accounting for forfeited
stock-based awards. Under the new standard, companies are no longer
permitted to account for forfeitures as they occur. Instead, companies
must now estimate expected forfeitures when the awards are granted and
record compensation expense only for those that are expected to vest.
In addition, the compensation obligation for expense previously
recognized in the financial statements was required to be reduced to
reflect awards that were not expected to vest. The after-tax amount of
this reduction is presented on the income statement as a cumulative effect
of a change in accounting principle. Key’s cumulative after-tax
adjustment increased first quarter 2006 earnings by $5 million, or
$.01 per diluted common share.
Second, prior to the adoption of SFAS No. 123R, total compensation cost
for stock-based, mandatorydeferred incentive compensation awards was
recognized in the plan year that the performance-related services
necessaryto earnthe 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 flows. Under SFAS No.
123R, cash flows resulting from the tax benefits of deductions in excess
of the compensation cost recognized for stock-based awards must 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 after their grant date,
and expire no later than ten years after 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 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.
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 103.
MARKETING COSTS
Key expenses all marketing-related costs, including advertising costs,
as incurred.
ACCOUNTING PRONOUNCEMENTS
ADOPTED IN 2008
Employers’ accounting for defined benefit pension and other post-
retirement plans. In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.” Except for the measurement requirement,
Key adopted this accounting guidance as of December 31, 2006. The
requirement to measure plan assets and benefit obligations as of the
end of an employer’s fiscal year is effective for years ending after
December 15, 2008 (effective December 31, 2008, for Key). Adoption of
this guidance did not have a material effect on Key’s financial condition
or results of operations. For more information about Key’s defined
benefit plans, including changes in the funding status, see Note 16
(“Employee Benefits”), which begins on page 106.
Fair value measurements. In September 2006, the FASB issued SFAS No.
157, which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements.
This guidance applies only when other guidance requires or permits
assets or liabilities to be measured at fair value; it does not expand the
use of fair value to any new circumstances. SFAS No. 157 became
effective for fiscal years beginning after November 15, 2007 (effective
January 1, 2008, for Key). In February 2008, the FASB issued Staff
Position No. FAS 157-2, which delayed the effective date of SFAS
No. 157 for all nonfinancial assets and liabilities, except those