US Bank 2002 Annual Report Download - page 60

Company’s recorded provision determined in accordance accounting policies are those policies that management
with generally accepted accounting principles in the United believes are the most important to the portrayal of the
States. The provision for credit losses reflected within the Company’s financial condition and results, and require
other business units is based on its net charge-offs adjusting management to make estimates that are difficult, subjective
for changes in the allowance for credit losses necessary to or complex. Most accounting policies are not considered by
reflect improvement or deterioration in the risk profile of its management to be critical accounting policies. Several
specific loan portfolios. Historical loss factors are applied to factors are considered in determining whether or not a
commercial loan commitments stratified by risk rating plus policy is critical in the preparation of financial statements.
the required amounts for homogeneous loan portfolios These factors include, among other things, whether the
based on twelve month projected losses in computing the estimates are significant to the financial statements, the
quarter end business unit allowance. The change in the nature of the estimates, the ability to readily validate the
managerial allowance for credit losses for the business units estimates with other information including third parties or
is reflected within the applicable business unit’s provision available prices, and sensitivity of the estimates to changes
for credit losses. The provision for credit losses was a loss in economic conditions and whether alternative accounting
of $293.8 million in 2002, compared with a net recovery of methods may be utilized under generally accepted
$157.0 million in 2001. The increase in the provision for accounting principles. Management has discussed the
credit losses in 2002 over 2001 reflected the continued development and the selection of critical accounting policies
elevated levels of net charge-offs and nonperforming assets with the Company’s Audit Committee.
on a consolidated level, despite the improving mix of risk Significant accounting policies are discussed in Note 1
ratings in the other reportable business units. Improvements of the Notes to Consolidated Financial Statements. Those
in the level of credit risk and mix of risk classifications policies considered to be critical accounting policies are
within the portfolios of the other business units were driven described below.
by reductions in higher risk loan commitments due to the Allowance for Credit Losses The allowance for credit losses
Company’s workout strategies. Refer to the ‘‘Corporate is established to provide for probable losses inherent in the
Risk Profile’’ section for further information on provision Company’s credit portfolio. The methods utilized to
for credit losses, nonperforming assets and factors estimate the allowance for credit losses, key assumptions
considered by the Company in assessing the credit quality and quantitative and qualitative information considered by
of the loan portfolio and establishing the allowance for management in determining the adequacy of the allowance
credit losses. for credit losses are discussed in the ‘‘Credit Risk
Management’’ section.
ACCOUNTING CHANGES
Management’s evaluation of the adequacy of the
Note 2 of the Notes to Consolidated Financial Statements allowance for credit losses is the most critical of accounting
discusses new accounting policies adopted by the Company estimates for a banking institution. It is a highly subjective
during 2002 and the expected impact of accounting policies process impacted by many factors as discussed throughout
recently issued or proposed but not yet required to be the Management’s Discussion and Analysis section of the
adopted. To the extent the adoption of new accounting Annual Report. Although risk management practices,
standards affects the Company’s financial condition, methodologies and other tools are utilized to determine
results of operations or liquidity, the impacts are each element of the allowance, degrees of imprecision exist
discussed in the applicable section(s) of the Management’s in these measurement tools due, in part, to subjective
Discussion and Analysis and the Notes to Consolidated judgments involved and an inherent lagging of credit quality
Financial Statements. measurements relative to the stage of the business cycle.
Even determining the stage of the business cycle is highly
CRITICAL ACCOUNTING POLICIES subjective. As discussed in the ‘‘Analysis and Determination
of Allowance for Credit Losses’’ section, management
The accounting and reporting policies of the Company
considers the effect of imprecision and many other factors
comply with accounting principles generally accepted in the
in determining the allowance for credit losses by
United States and conform to general practices within the
establishing an ‘‘allowance for other factors’’ that is not
banking industry. The preparation of financial statements in
specifically allocated to a category of loans. If not
conformity with generally accepted accounting principles
considered, inherent losses in the portfolio related to
requires management to make estimates and assumptions.
imprecision and other subjective factors could have a
The financial position and results of operations can be
dramatic adverse impact on the liquidity and financial
affected by these estimates and assumptions, which are
viability of a bank.
integral to understanding reported results. Critical
58 U.S. Bancorp