Bank One Corporation - Page 63

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               On July 23, 1993, FNBC’s Control Department issued FAPM 396,           
          entitled “Nonperforming Variable Exposure Product                           
          Transactions”.53  In relevant part, this document established the           
          policies for dealing with a swap (or other variable exposure                
          product) if the counterparty had not made a payment which FNBC              
          had an unqualified right to receive.  According to FAPM 396,                
          FNBC’s policy was to account for swaps with a past due periodic             
          payment using a “‘modified’ lower of cost or market”.  FAPM 396             
          stated further that changes in the value were recognized in the             
          applicable trading profits account currently as losses or gains             
          (only to the extent of prior losses).  FAPM 396 further stated              
          that the modified lower of cost or market accounting treatment              
          might occur when (1) payment that FNBC had an unqualified right             
          to receive had not been made when due and (2) it had been                   
          determined that the contract is nonperforming.                              
          XIII.  FNBC Had No Schedule M Adjustments                                   
               There were no Schedule M adjustments on FNBC’s tax returns             
          with respect to swaps booked through FNBC.                                  
          XIV.  Nature and Amount of the Proposed Disallowances                       
               The audit of FNBC’s 1990 and 1991 taxable years commenced in           
          December 1992.  The assigned agent’s focus during the audit was             


          53 A contract was considered “nonperforming” if it was                      
          determined that a counterparty would probably not fulfill its               
          cashflow (or other exchange) obligation under the terms of the              
          contract.                                                                   




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