Accounting Policies (Policy)

3 Months Ended

Mar. 31, 2018

Basis of Financial Statement Presentation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE PNC FINANCIAL SERVICES GROUP, INC.

Unaudited

BUSINESS

The PNC Financial Services Group, Inc. (PNC) is one of the largest diversified financial services companies in the United States and is headquartered in Pittsburgh, Pennsylvania.

We have businesses engaged in retail banking, including residential mortgage, corporate and institutional banking and asset management, providing many of our products and services nationally. Our primary geographic markets are located in the Mid-Atlantic, Midwest and Southeast. We also provide certain products and services internationally.

Basis of Financial Statement Presentation

Our consolidated financial statements include the accounts of the parent company and its subsidiaries, most of which are wholly-owned, certain partnership interests and variable interest entities.

We prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation, which did not have a material impact on our consolidated financial condition or results of operations.

In our opinion, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

We have also considered the impact of subsequent events on these consolidated financial statements.

When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2017 Form 10-K. Reference is made to Note 1 Accounting Policies in our 2017 Form 10-K for a detailed description of significant accounting policies. There have been no significant changes to our accounting policies as disclosed in our 2017 Form 10-K, except for those accounting policies included in this Note as a result of the adoption of new accounting standards that were effective in the first quarter of 2018. These interim consolidated financial statements serve to update our 2017 Form 10-K and may not include all information and Notes necessary to constitute a complete set of financial statements.

Use of Estimates

We prepared these consolidated financial statements using financial information available at the time of preparation, which requires us to make estimates and assumptions that affect the amounts reported. Our most significant estimates pertain to our fair value measurements and allowances for loan and lease losses and unfunded loan commitments and letters of credit. Actual results may differ from the estimates and the differences may be material to the consolidated financial statements.

Revenue Recognition

We earn interest and noninterest income from various sources, including:


•	Lending,


•	Securities portfolio,


•	Asset management,


•	Customer deposits,


•	Loan sales, loan securitizations, and servicing,


•	Brokerage services,


•	Sale of securities,


•	Certain private equity activities, and


•	Securities, derivatives and foreign exchange activities

In addition, we earn fees and commissions from:


•	Issuing loan commitments, standby letters of credit and financial guarantees,


•	Deposit account services,


•	Merchant services,


•	Selling various insurance products,


•	Providing treasury management services,


•	Providing merger and acquisition advisory and related services


•	Debit and credit card transactions, and


•	Participating in certain capital markets transactions.

Our Asset management noninterest income also includes our share of the earnings of BlackRock recognized under the equity method of accounting.

We record private equity income or loss based on changes in the valuation of the underlying investments or when we dispose of our interest.

We recognize gain/(loss) on changes in the fair value of certain financial instruments where we have elected the fair value option. These financial instruments include certain commercial and residential mortgage loans originated for sale, certain residential mortgage portfolio loans, resale agreements and our investment in BlackRock Series C preferred stock. We also recognize gain/(loss) on changes in the fair value of residential and commercial mortgage servicing rights (MSRs).

We recognize revenue from servicing residential mortgages, commercial mortgages and other consumer loans as earned based on the specific contractual terms. These revenues are reported on the Consolidated Income Statement in the line items Residential mortgage, Corporate services and Consumer services. We recognize revenue from securities, derivatives and foreign exchange customer-related trading, as well as securities underwriting activities, as these transactions occur or as services are provided. We generally recognize gains from the sale of loans upon receipt of cash. Mortgage revenue recognized is reported net of mortgage repurchase reserves.

For the fee-based revenue within the scope of ASC Topic 606 - Revenue from Contracts with Customers (Topic 606), revenue is recognized when or as those services are transferred to the customer. See Note 15 Fee-based Revenue from Contracts with Customers for additional information related to revenue within the scope of Topic 606.

Equity Securities and Partnership Interests

We account for equity securities and equity investments other than BlackRock and private equity investments under one of the following methods:


•	Equity securities that have a readily determinable fair value are included in Equity investments on our Consolidated Balance Sheet. Both realized and unrealized gains and losses are included in Noninterest income. Dividend income on these equity securities is included in Other interest income on our consolidated income statement.

•

For investments in limited partnerships, limited liability companies and other investments that are not required to be consolidated, we use either the equity method of accounting or the practicability exception to fair value. We use the equity method for general and limited partner ownership interests and limited liability companies in which we are considered to have significant influence over the operations of the investee. Under the equity method, we record our equity ownership share of net income or loss of the investee in Noninterest income and any dividends received on equity method investments are recorded as a reduction to the investment balance. When an equity investment experiences an other-than-temporary decline in value, we may be required to record a loss on the investment.

•

We generally use the practicability exception to fair value for all other investments. When we elect this alternative measurement method, the carrying value is adjusted for impairment, if any, plus or minus changes in value resulting from observable price changes in orderly transactions for identical or similar instruments of the same issuer. These investments are written down to fair value if a qualitative assessment indicates impairment and the fair value is less than the carrying value. The amount of the write-down is accounted for as a loss included in Noninterest income. Distributions received on these investments are included in Noninterest income.

Investments described above are included in Equity investments on our Consolidated Balance Sheet.

See Note 1 Accounting Policies of our 2017 Form 10-K for a discussion on our accounting for our investment in BlackRock and private equity investments.

Derivative Instruments and Hedging Activities

We use a variety of financial derivatives as part of our overall asset and liability risk management process to help manage exposure to interest rate, market and credit risk inherent in our business activities. Interest rate and total return swaps, swaptions, interest rate caps and floors, options, forwards, and futures contracts are the primary instruments we use for risk management. Financial derivatives involve, to varying degrees, interest rate, market and credit risk. We manage these risks as part of our asset and liability management process and through credit policies and procedures.

We recognize all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement of Cash Flows. Adjustments for counterparty credit risk are included in the determination of fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a cash flow or net investment hedging relationship. For all other derivatives, changes in fair value are recognized in earnings.

We utilize a net presentation for derivative instruments on the Consolidated Balance Sheet taking into consideration the effects of legally enforceable master netting agreements. Cash collateral exchanged with counterparties is also netted against the applicable derivative exposures by offsetting obligations to return, or general rights to reclaim, cash collateral against the fair values of the net derivatives being collateralized.

For those derivative instruments that are designated and qualify as accounting hedges, we designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of the net investment in a foreign operation.

We formally document the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy, before undertaking an accounting hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge at inception of the hedge relationship. In addition, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. For accounting hedge relationships, we formally assess, both at the inception of the hedge and on an ongoing basis, if the derivatives are highly effective in offsetting designated changes in the fair value or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued. We assess effectiveness using statistical regression analysis. Where the critical terms of the derivative and hedged item match, effectiveness may be assessed qualitatively.

For derivatives that are designated as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability attributable to a particular risk, such as changes in LIBOR), changes in the fair value of the hedging instrument are recognized in earnings and offset by also recognizing in earnings the changes in the fair value of the hedged item attributable to the hedged risk. To the extent the change in fair value of the derivative does not offset the change in fair value of the hedged item, the difference is reflected in the Consolidated Income Statement in the same income statement line as the hedged item.

For derivatives designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows), the gain or loss on derivatives is reported as a component of Accumulated other comprehensive income (loss) and subsequently reclassified to income in the same period or periods during which the hedged cash flows affect earnings and recorded in the same income statement line item as the hedged cash flows. For derivatives designated as a hedge of net investment in a foreign operation, the gain or loss on the derivatives are reported as a component of Accumulated other comprehensive income (loss).

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is de-designated as a fair value or cash flow hedge or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period.

We purchase or originate financial instruments that contain an embedded derivative. For financial instruments not measured at fair value with changes in fair value reported in earnings, we assess, at inception of the transaction, if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the host contract and whether a separate instrument with the same terms as the embedded derivative would be a derivative. If the embedded derivative is not clearly and closely related to the host contract and meets the definition of a derivative, the embedded derivative is recorded separately from the host contract with changes in fair value recorded in earnings, unless we elect to account for the hybrid instrument at fair value.

We have elected, on an instrument-by-instrument basis, fair value measurement for certain financial instruments with embedded derivatives.

We enter into commitments to originate residential and commercial mortgage loans for sale. We also enter into commitments to purchase or sell commercial and residential real estate loans. These commitments are accounted for as free-standing derivatives which are recorded at fair value in Other assets or Other liabilities on the Consolidated Balance Sheet. Any gain or loss from the change in fair value after the inception of the commitment is recognized in Noninterest income.

Recently Adopted Accounting Standards



Accounting Standards Update (ASU)	Description	Financial Statement Impact
Revenue Recognition - ASU 2014-09 ASU 2015-14 ASU 2016-08 ASU 2016-10 ASU 2016-12 ASU 2016-20 Issued May 2014	• Replaces nearly all existing revenue recognition guidance in U.S. GAAP. • Revenue recognized when an entity satisfies its performance obligation by transferring a promised good or service to a customer. • Additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.	• Adopted January 1, 2018 under the modified retrospective approach. • Cumulative-effect adjustment was immaterial to our consolidated results of operations and financial position. • Most significant impact of adoption is expanded disclosures related to disaggregation of in-scope revenue, see Note 15 Fee-based Revenue from Contracts with Customers.
Financial Instruments - ASU 2016-01 ASU 2018-03 Issued January 2016	• Changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. • Equity investments not accounted for under the equity method of accounting are required to be measured at fair value with any changes in fair value recognized in net income. • For an equity investment which does not have a readily determinable fair value, an election can be made to measure the investment at cost, less any impairment, plus or minus changes in value resulting from observable price changes in identical or similar instruments of the issuer. • Simplifies the impairment assessment of equity investments for which fair value is not readily determinable. • Changes the presentation of certain fair value changes for financial liabilities measured at fair value and amends certain disclosure requirements relating to the fair value of financial instruments. In addition, separate presentation is required of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the notes to the financial statements.	• Adopted January 1, 2018 under the modified retrospective approach, except for the amendment related to equity securities without readily determinable fair values, which is applied prospectively. • Cumulative-effect adjustment was immaterial to our consolidated results of operations and financial position. • For the standard’s requirement for a separate presentation of financial assets and financial liabilities by measurement category, refer to the disclosures in this Note 1, and Note 6 Fair Value and Note 1 Accounting Policies in our 2017 Form 10-K for further discussion of our measurement categories.
Statement of Cash Flows - ASU 2016-15 Issued August 2016	• Provides guidance on eight specific issues related to classification within the statement of cash flows with the objective of reducing existing diversity in practice. • The specific issues cover: • cash payments for debt prepayment or debt extinguishment costs; • cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant; • contingent consideration payments that are not made soon after a business combination; • proceeds from the settlement of insurance claims; • proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; • distributions received from equity method investees; • beneficial interests received in securitization transactions; and • clarifies that when no specific GAAP guidance exists and the source of the cash flows are not separately identifiable, then the predominant source of cash flows should be used to determine the classification for the item.	• Adopted January 1, 2018 under the retrospective transition method. • Impact of adoption was immaterial to our consolidated statement of cash flows.
Compensation-Retirement Benefits - ASU 2017-07 Issued March 2017	• Requires the service cost component of net periodic pension cost and net periodic postretirement benefit cost (net benefit cost) to be included in the same income statement line as other employee compensation cost arising from services rendered during the period. • Other components of net benefit cost are required to be presented separately from the line item that includes the service cost component and outside a subtotal of income from operations, if one is presented. • Allows only the service cost component to be eligible for capitalization when applicable.	• Adopted January 1, 2018. • Presentation requirements in our Consolidated Income Statement have been applied retrospectively. • Impact of adoption was immaterial to our consolidated results of operations and financial position.



Accounting Standards Update (ASU)	Description	Financial Statement Impact
Derivatives and Hedging - ASU 2017-12 Issued August 2017	• Simplifies the application of hedge accounting by easing the requirements for effectiveness testing, hedge documentation and the application of the critical terms match method. • Provides new alternatives for applying hedge accounting to additional hedging strategies and measuring the hedged item in fair value hedges of interest rate risk.	• Adopted January 1, 2018 using the modified retrospective approach. • Amended presentation and disclosures are required prospectively. • One-time transition elections were available to modify existing hedge documentation. • Cumulative-effect adjustment was immaterial to our consolidated results of operations and financial position.
Comprehensive Income - ASU 2018-02 Issued February 2018	• Permits the reclassification to retained earnings of the income tax effects stranded within Accumulated other comprehensive income (loss) (AOCI) as a result of the enactment of the Tax Cuts and Jobs Act. • Requires qualitative disclosures of the accounting policy relating to releasing income tax effects from AOCI and if the reclassification election is made, the impacts of the change on the financial statements.	• Adopted January 1, 2018 and elected to reclassify the income tax effects from AOCI to Retained earnings at the beginning of the period of adoption. • The impact of adoption was immaterial to our consolidated financial position.