US Bank 2004 Annual Report Download - page 62
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Please find page 62 of the 2004 US Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.economic conditions. Refer to the ‘‘Corporate Risk Profile’’ third-parties or available prices, and sensitivity of the
section for further information on the provision for credit estimates to changes in economic conditions and whether
losses, nonperforming assets and factors considered by the alternative accounting methods may be utilized under
Company in assessing the credit quality of the loan generally accepted accounting principles. Management has
portfolio and establishing the allowance for credit losses. discussed the development and the selection of critical
Income taxes are assessed to each line of business at a accounting policies with the Company’s Audit Committee.
standard tax rate with the residual tax expense or benefit to Significant accounting policies are discussed in Note 1
arrive at the consolidated effective tax rate included in of the Notes to Consolidated Financial Statements. Those
Treasury and Corporate Support. 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 but not yet Company’s credit portfolio. The methods utilized to
required to be adopted and the expected impact of the estimate the allowance for credit losses, key assumptions
changes in accounting standards. To the extent the adoption and quantitative and qualitative information considered by
of new accounting standards affects the Company’s management in determining the adequacy of the allowance
financial condition, results of operations or liquidity, the for credit losses are discussed in the ‘‘Credit Risk
impacts are discussed in the applicable section(s) of the Management’’ section.
Management’s Discussion and Analysis and the Notes to Management’s evaluation of the adequacy of the
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 an
‘‘fair value’’ method of accounting for stock-based inherently subjective process impacted by many factors as
compensation. The Company implemented this accounting discussed throughout the Management’s Discussion and
change utilizing the ‘‘retroactive restatement method,’’ Analysis section of the Annual Report. Although risk
requiring all prior periods to be restated to recognize management practices, methodologies and other tools are
compensation expense for the estimated fair value of all utilized to determine each element of the allowance, degrees
employee stock awards including stock options granted, of imprecision exist in these measurement tools due in part
modified or settled in fiscal years beginning after to 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 credit losses may not
that management believes are the most important to the 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. Also, inherent loss ratios,
validate the estimates with other information including
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