US Bank 2015 Annual Report Download - page 77

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 an
analysis with respect to the accuracy of risk ratings and the
volatility of inherent losses, and utilizes this analysis along with
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