US Bank 2010 Annual Report Download - page 63

ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements
discusses accounting standards adopted in 2010, as well as
accounting standards recently issued but not yet required to
be adopted and the expected impact of these changes in
accounting standards. To the extent the adoption of new
accounting standards materially affects the Company’s
financial condition or results of operations, the impacts are
discussed in the applicable section(s) of the Management’s
Discussion and Analysis and the Notes to Consolidated
Financial Statements.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company
comply with accounting principles generally accepted in the
United States and conform to general practices within the
banking industry. The preparation of financial statements in
conformity with GAAP requires management to make
estimates and assumptions. The Company’s financial
position and results of operations can be affected by these
estimates and assumptions, which are integral to
understanding the Company’s financial statements. Critical
accounting policies are those policies management believes
are the most important to the portrayal of the Company’s
financial condition and results, and require management to
make estimates that are difficult, subjective or complex.
Most accounting policies are not considered by management
to be critical accounting policies. Several factors are
considered in determining whether or not a policy is critical
in the preparation of financial statements. These factors
include, among other things, whether the estimates are
significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with
other information (including third-parties sources or
available prices), and sensitivity of the estimates to changes
in economic conditions and whether alternative accounting
methods may be utilized under GAAP. Management has
discussed the development and the selection of critical
accounting policies with the Company’s Audit Committee.
Significant accounting policies are discussed in Note 1
of the Notes to Consolidated Financial Statements. Those
policies considered to be critical accounting policies are
described below.
Allowance for Credit Losses The allowance for credit losses
is established to provide for probable losses incurred in the
Company’s credit portfolio. The methods utilized to estimate
the allowance for credit losses, key assumptions and
quantitative and qualitative information considered by
management in determining the adequacy of the allowance
for credit losses are discussed in the “Credit Risk
Management” section.
Management’s evaluation of the adequacy of the
allowance for credit losses is often the most critical of
accounting estimates for a banking institution. It is an
inherently subjective process impacted by many factors as
discussed throughout the Management’s Discussion and
Analysis section of the Annual Report. Although risk
management practices, methodologies and other tools are
utilized to determine each element of the allowance, degrees
of imprecision exist in these measurement tools due in part
to subjective judgments involved and an inherent lagging of
credit quality measurements relative to the stage of the
business cycle. Even determining the stage of the business
cycle is highly subjective. As discussed in the “Analysis and
Determination of Allowance for Credit Losses” section,
management considers the effect of imprecision and many
other factors in determining the allowance for credit losses.
If not considered, incurred losses in the portfolio related to
imprecision and other subjective factors could have a
dramatic adverse impact on the liquidity and financial
viability of a bank.
Given the many subjective factors affecting the credit
portfolio, changes in the allowance for credit losses may not
directly coincide with changes in the risk ratings of the
credit portfolio reflected in the risk rating process. This is in
part due to the timing of the risk rating process in relation
to changes in the business cycle, the exposure and mix of
loans within risk rating categories, levels of nonperforming
loans and the timing of charge-offs and recoveries. For
example, the amount of loans within specific risk ratings
may change, providing a leading indicator of improving
credit quality, while nonperforming loans and net charge-
offs continue at elevated levels. Also, inherent loss ratios,
determined through migration analysis and historical loss
performance over the estimated business cycle of a loan,
may not change to the same degree as net charge-offs.
Because risk ratings and inherent loss ratios primarily drive
the allowance specifically allocated to commercial loans, the
amount of the allowance for commercial and commercial
real estate loans might decline; however, the degree of
change differs somewhat from the level of changes in
nonperforming loans and net charge-offs. Also, management
would maintain an adequate allowance for credit losses by
increasing the allowance during periods of economic
uncertainty or changes in the business cycle.
Some factors considered in determining the adequacy of
the allowance for credit losses are quantifiable while other
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