US Bank 2003 Annual Report Download - page 61

States. The provision for credit losses was a net recovery of alternative accounting methods may be utilized under
$1.8 million in 2003, compared with a net recovery of generally accepted accounting principles. Management has
$26.7 million in 2002. Refer to the ‘‘Corporate Risk discussed the development and the selection of critical
Profile’’ section for further information on the provision for accounting policies with the Company’s Audit Committee.
credit losses, nonperforming assets and factors considered Significant accounting policies are discussed in Note 1
by the Company in assessing the credit quality of the loan of the Notes to Consolidated Financial Statements. Those
portfolio and establishing the allowance for credit losses. policies considered to be critical accounting policies are
described below.
ACCOUNTING CHANGES
Allowance for Credit Losses The allowance for credit losses
Note 2 of the Notes to Consolidated Financial Statements is established to provide for probable losses inherent in the
discusses accounting standards recently issued or proposed Company’s credit portfolio. The methods utilized to
but not yet required to be adopted and the expected impact estimate the allowance for credit losses, key assumptions
of the changes in accounting standards. To the extent the and quantitative and qualitative information considered by
adoption of new accounting standards affects the management in determining the adequacy of the allowance
Company’s financial condition, results of operations or for credit losses are discussed in the ‘‘Credit Risk
liquidity, the impacts are discussed in the applicable Management’’ section.
section(s) of the Management’s Discussion and Analysis and Management’s evaluation of the adequacy of the
the Notes to Consolidated Financial Statements. allowance for credit losses is often the most critical of
On January 8, 2004, the Company elected to adopt the accounting estimates for a banking institution. It is a highly
‘‘fair value’’ method of accounting for stock-based subjective process impacted by many factors as discussed
compensation. The Company implemented this accounting throughout the Management’s Discussion and Analysis
change utilizing the ‘‘retroactive restatement method,’’ section of the Annual Report. Although risk management
requiring all prior periods to be restated to recognize practices, methodologies and other tools are utilized to
compensation expense for the estimated fair value of all determine each element of the allowance, degrees of
employee stock awards including stock options granted, imprecision exist in these measurement tools due in part to
modified or settled in fiscal years beginning after subjective judgments involved and an inherent lagging of
December 15, 1994. credit quality measurements relative to the stage of the
business cycle. Even determining the stage of the business
CRITICAL ACCOUNTING POLICIES cycle is highly subjective. As discussed in the ‘‘Analysis and
Determination of Allowance for Credit Losses’’ section,
The accounting and reporting policies of the Company
management considers the effect of imprecision and many
comply with accounting principles generally accepted in the
other factors in determining the allowance for credit losses
United States and conform to general practices within the
by 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 the Company’s financial
Given the many subjective factors affecting the credit
statements. Critical accounting policies are those policies
portfolio, changes in the allowance for other factors may
that management believes are the most important to the
not directly coincide with changes in the risk ratings of the
portrayal of the Company’s financial condition and results,
credit portfolio reflected in the risk rating process. This is in
and require management to make estimates that are
part due to the timing of the risk rating process in relation
difficult, subjective or complex. Most accounting policies
to changes in the business cycle, the exposure and mix of
are not considered by management to be critical accounting
loans within risk rating categories, levels of nonperforming
policies. Several factors are considered in determining
loans and the timing of charge-offs and recoveries. For
whether or not a policy is critical in the preparation of
example, the amount of loans within specific risk ratings
financial statements. These factors include, among other
may change, providing a leading indicator of improving
things, whether the estimates are significant to the financial
credit quality, while nonperforming loans and net charge-
statements, the nature of the estimates, the ability to readily
offs continue at elevated levels. Because the allowance
validate the estimates with other information including
specifically allocated to commercial loans is primarily driven
third-parties or available prices, and sensitivity of the
by risk ratings and loss ratios determined through migration
estimates to changes in economic conditions and whether
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