TCF Bank 2006 Annual Report Download - page 69

2006 Form10-K 49
Lease Financing TCF provides various types of lease
financing that are classified for accounting purposes as
direct financing, sales-type or operating leases. Leases
that transfer substantially all of the benefits and risks of
equipment ownership to the lessee are classified as direct
financing or sales-type leases and are included in loans and
leases. Direct financing and sales-type leases are carried
at the combined present value of the future minimum lease
payments and the lease residual value. The determination
of the lease classification requires various judgments and
estimates by management including the fair value of the
equipment at lease inception, useful life of the equipment
under lease, estimate of the lease residual value and
collectibility of minimum lease payments.
Sales-type leases generate dealer profit which is recog-
nized at lease inception by recording lease revenue net of
the lease cost. Lease revenue consists of the present value
of the future minimum lease payments. Lease cost consists
of the leased equipment’s book value, less the present
value of its residual. The revenues associated with other
types of leases are recognized over the term of the underly-
ing leases. Interest income on direct financing and sales-
type leases is recognized using methods which approximate
a level yield over the fixed, non-cancelable term of the
leases. TCF receives pro-rata rent payments for the interim
period until the lease contract commences and the fixed,
non-cancelable, lease term begins. TCF recognizes these
interim payments in the month they are earned and records
the income in interest income on direct finance leases.
Management has policies and procedures in place for the
determination of lease classification and review of the
related judgments and estimates for all lease financings.
Some lease financings include a residual value compo-
nent, which represents the estimated fair value of the
leased equipment at the expiration of the initial term of
the transaction. The estimation of residual values involves
judgments regarding product and technology changes,
customer behavior, shifts in supply and demand and other
economic assumptions. These estimates are reviewed at
least annually and downward adjustments, if necessary,
are charged to non-interest expense in the periods in which
they become known.
Leases which do not transfer substantially all benefits
and risks of ownership to the lessee are classified as oper-
ating leases. Operating leases represent a rental agreement
where ownership of the underlying equipment resides with
the lessor. Such leased equipment and related initial
direct costs are included in other assets on the balance sheet
and are depreciated on a straight-line basis over the term
of the lease to its estimated salvage value. Depreciation
expense is recorded as operating lease expense and included
in non-interest expense. Operating lease rental income is
recognized when it is due according to the provisions of
the lease and is reflected as a component of non-interest
income. An allowance for lease losses is not provided on
operating leases.
Income Taxes Income taxes are accounted for using the
asset and liability method. Under this method, deferred tax
assets and liabilities are recognized for the future tax con-
sequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax-basis carrying amount. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
The determination of current and deferred income taxes
is based on complex analyses of many factors including
interpretation of federal and state income tax laws, the
difference between the tax reporting basis and the financial
reporting basis of assets and liabilities, estimates of amounts
due or owed, the timing of reversals of temporary differences
and current financial accounting standards. Actual results
could differ significantly from the estimates and tax law
interpretations used in determining the current and deferred
income tax liabilities. Additionally, there can be no assur-
ances that estimates and interpretations used in determin-
ing income tax liabilities may not be challenged by federal
and state taxing authorities.
In the preparation of income tax returns, tax positions
are taken based on interpretation of federal and state
income tax laws for which the outcome is uncertain.
Management periodically reviews and evaluates the status
of uncertain tax positions and makes estimates of amounts
ultimately due or owed. The benefit of tax positions are
recorded in income tax expense in the consolidated finan-
cial statements net of the estimates of ultimate amounts
due or owed including any applicable interest and penalties.
Changes in the estimated amounts due or owed may result
from closing of the statute of limitations on tax returns,
new legislation, clarification of existing legislation,
through government pronouncements, the courts, and
through the examination process.