US Bank 2007 Annual Report Download - page 77

the hedge and on a quarterly basis thereafter, when required,
to determine whether these derivatives are highly effective in
offsetting changes in the value of the hedged items. Any
change in fair value resulting from hedge ineffectiveness is
immediately recorded in noninterest income.
If a derivative designated as a hedge is terminated or
ceases to be highly effective, the gain or loss is amortized to
earnings over the remaining life of the hedged asset or
liability (fair value hedge) or over the same period(s) that the
forecasted hedged transactions impact earnings (cash flow
hedge). If the hedged item is disposed of, or the forecasted
transaction is no longer probable, the derivative is recorded
at fair value with any resulting gain or loss included in the
gain or loss from the disposition of the hedged item or, in
the case of a forecasted transaction that is no longer
probable, included in earnings immediately.
REVENUE RECOGNITION
The Company recognizes revenue as it is earned based on
contractual terms, as transactions occur, or as services are
provided and collectibility is reasonably assured. In certain
circumstances, noninterest income is reported net of
associated expenses that are directly related to variable
volume-based sales or revenue sharing arrangements or
when the Company acts on an agency basis for others.
Certain specific policies include the following:
Credit and Debit Card Revenue Credit and debit card
revenue includes interchange income from credit and debit
cards, annual fees, and other transaction and account
management fees. Interchange income is a fee paid by a
merchant bank to the card-issuing bank through the
interchange network. Interchange fees are set by the credit
card associations and are based on cardholder purchase
volumes. The Company records interchange income as
transactions occur. Transaction and account management
fees are recognized as transactions occur or services are
provided, except for annual fees, which are recognized over
the applicable period. Volume-related payments to partners
and credit card associations and expenses for rewards
programs are also recorded within credit and debit card
revenue. Payments to partners and expenses related to
rewards programs are recorded when earned by the partner
or customer.
Merchant Processing Services Merchant processing services
revenue consists principally of transaction and account
management fees charged to merchants for the electronic
processing of transactions, net of interchange fees paid to
the credit card issuing bank, card association assessments,
and revenue sharing amounts, and are all recognized at the
time the merchant’s transactions are processed or other
services are performed. The Company may enter into
revenue sharing agreements with referral partners or in
connection with purchases of merchant contracts from
sellers. The revenue sharing amounts are determined
primarily on sales volume processed or revenue generated
for a particular group of merchants. Merchant processing
revenue also includes revenues related to point-of-sale
equipment recorded as sales when the equipment is shipped
or as earned for equipment rentals.
Trust and Investment Management Fees Trust and
investment management fees are recognized over the period
in which services are performed and are based on a
percentage of the fair value of the assets under management
or administration, fixed based on account type, or
transaction-based fees.
Deposit Service Charges Service charges on deposit
accounts primarily represent monthly fees based on
minimum balances or transaction-based fees. These fees are
recognized as earned or as transactions occur and services
are provided.
OTHER SIGNIFICANT POLICIES
Intangible Assets The price paid over the net fair value of
the acquired businesses (“goodwill”) is not amortized. Other
intangible assets are amortized over their estimated useful
lives, using straight-line and accelerated methods. The
recoverability of goodwill and other intangible assets is
evaluated annually, at a minimum, or on an interim basis if
events or circumstances indicate a possible inability to
realize the carrying amount. The evaluation includes
assessing the estimated fair value of the intangible asset
based on market prices for similar assets, where available,
and the present value of the estimated future cash flows
associated with the intangible asset.
Income Taxes Deferred taxes are recorded to reflect the tax
consequences on future years of differences between the tax
basis of assets and liabilities and the financial reporting
amounts at each year-end.
Mortgage Servicing Rights Mortgage servicing rights
(“MSRs”) are capitalized as separate assets when loans are
sold and servicing is retained or may be purchased from
others. MSRs are initially recorded at fair value, if
practicable, and at each subsequent reporting date. 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
U.S. BANCORP 75