US Bank 2007 Annual Report Download - page 65

market with readily observable prices, the Company
determines the fair value by estimating the present value of
the asset’s future cash flows utilizing market-based
prepayment rates, discount rates, and other assumptions
validated through comparison to trade information, industry
surveys and independent third party appraisals. Changes in
the fair value of MSRs are recorded in earnings during the
period in which they occur. Risks inherent in the MSRs
valuation include higher than expected prepayment rates
and/or delayed receipt of cash flows. The Company may
utilize derivatives, including futures and options contracts to
mitigate the valuation risk. The estimated sensitivity to
changes in interest rates of the fair value of the MSRs
portfolio and the related derivative instruments at
December 31, 2007, to an immediate 25 and 50 basis point
downward movement in interest rates would be an increase
of approximately $1 million and a decrease of
approximately $8 million, respectively. An upward
movement in interest rates at December 31, 2007, of 25 and
50 basis points would decrease the value of the MSRs and
related derivative instruments by approximately $14 million
and $49 million, respectively. Refer to Note 9 of the Notes
to Consolidated Financial Statements for additional
information regarding MSRs.
Goodwill and Other Intangibles The Company records all
assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value.
Goodwill and indefinite-lived assets are not amortized but
are subject, at a minimum, to annual tests for impairment.
Under certain situations, interim impairment tests may be
required if events occur or circumstances change that would
more likely than not reduce the fair value of a reporting
segment below its carrying amount. Other intangible assets
are amortized over their estimated useful lives using straight-
line and accelerated methods and are subject to impairment
if events or circumstances indicate a possible inability to
realize the carrying amount.
The initial recognition of goodwill and other intangible
assets and subsequent impairment analysis require
management to make subjective judgments concerning
estimates of how the acquired assets will perform in the
future using valuation methods including discounted cash
flow analysis. Additionally, estimated cash flows may extend
beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors
that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures,
technology, changes in discount rates and specific industry
and market conditions. In determining the reasonableness of
cash flow estimates, the Company reviews historical
performance of the underlying assets or similar assets in an
effort to assess and validate assumptions utilized in its
estimates.
In assessing the fair value of reporting units, the
Company may consider the stage of the current business
cycle and potential changes in market conditions in
estimating the timing and extent of future cash flows. Also,
management often utilizes other information to validate the
reasonableness of its valuations including public market
comparables, and multiples of recent mergers and
acquisitions of similar businesses. Valuation multiples may
be based on revenue, price-to-earnings and tangible capital
ratios of comparable public companies and business
segments. These multiples may be adjusted to consider
competitive differences including size, operating leverage and
other factors. The carrying amount of a reporting unit is
determined based on the capital required to support the
reporting unit’s activities including its tangible and
intangible assets. The determination of a reporting unit’s
capital allocation requires management judgment and
considers many factors including the regulatory capital
regulations and capital characteristics of comparable public
companies in relevant industry sectors. In certain
circumstances, management will engage a third-party to
independently validate its assessment of the fair value of its
business segments.
The Company’s annual assessment of potential goodwill
impairment was completed during the second quarter of
2007. Based on the results of this assessment, no goodwill
impairment was recognized.
Income Taxes The Company estimates income tax expense
based on amounts expected to be owed to various tax
jurisdictions. Currently, the Company files tax returns in
approximately 144 federal, state and local domestic
jurisdictions and 13 foreign jurisdictions. The estimated
income tax expense is reported in the Consolidated
Statement of Income. Accrued taxes represent the net
estimated amount due or to be received from taxing
jurisdictions either currently or in the future and are
reported in other assets or other liabilities on the
Consolidated Balance Sheet. In estimating accrued taxes, the
Company assesses the relative merits and risks of the
appropriate tax treatment considering statutory, judicial and
regulatory guidance in the context of the tax position.
Because of the complexity of tax laws and regulations,
interpretation can be difficult and subject to legal judgment
given specific facts and circumstances. It is possible that
others, given the same information, may at any point in time
reach different reasonable conclusions regarding the
estimated amounts of accrued taxes.
Changes in the estimate of accrued taxes occur
periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by
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