US Bank 2014 Annual Report Download - page 75

ACCOUNTING CHANGES
Note 2 of the Notes to Consolidated Financial Statements
discusses 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 party sources or available
prices), 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 appropriate allowance for
credit losses are discussed in the “Credit Risk Management”
section.
Management’s evaluation of the appropriate allowance
for credit losses is often the most critical of all the
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
methodologies utilized to determine each element of the
allowance reflect management’s assessment of credit risk
as identified through assessments completed of individual
credits and of homogenous pools affected by material credit
events, 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 changes in
economic conditions, risk management practices, and other
factors that contribute to imprecision of loss estimates 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 banking institution.
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 changing credit quality, while
nonperforming loans and net charge-offs may be slower to
reflect changes. 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 lending segment loans,
the degree of change in the commercial lending allowance
may differ from the level of changes in nonperforming loans
and net charge-offs. Also, management would maintain an
appropriate allowance for credit losses by increasing
allowance rates during periods of economic uncertainty or
changes in the business cycle.
Some factors considered in determining the appropriate
allowance for credit losses are quantifiable while other
factors require qualitative judgment. Management conducts
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