Notes to C onsolidated Financial Statements (Currencies in Thousands, Except Per Share Data) NO TE A Significant Accounting Policies BUSINESS BASIS OF PRESENTATION RECENT ACCOUNTING PRONOUNCEMENTS The Consolidated Financial Statements include the accounts of Capital One Financial Corporation (the “Corporation”) and its subsidiaries. The Corporation is a holding company whose subsidiaries market a variety of financial products and services to consumers. The principal subsidiaries are Capital One Bank (the “Bank”), which offers credit card products, Capital One, F.S.B. (the “Savings Bank”), which offers consumer lending (including credit cards) and deposit products, and Capital One Auto Finance, Inc. (“COAF”) which offers auto loans. The Corporation and its subsidiaries are collectively referred to as the “Company.” The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.  All significant intercompany balances and transactions have been eliminated. Certain prior years’ amounts have been reclassified to conform to the 2002 presentation. The following is a summary of the significant accounting policies used in preparation of the accompanying Consolidated Financial Statements. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”),  Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 . This interpretation addresses consolidation of business enterprises of variable interest entities, which have certain characteristics. These characteristics include either that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or that the equity investors in the entity lack one or more of the essential characteristics of a controlling financial interest. FIN 46 is designed to improve financial reporting by enterprises involved with variable interest entities by providing guidance and standards for consolidation of such entities in the financial statements. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and on July 1, 2003 for variable interests acquired before February 1, 2003. See Note P, Commitments, Contingencies and Guarantees, for discussion of special purpose vehicles used in synthetic lease transactions. All securitization transactions that receive sale treatment under SFAS No. 140,  Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a In July of 2002, the FASB issued SFAS No. 146,  Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 requires that a liability for a disposal obligation be recognized and measured at its fair value when it is incurred rather then at the date to the Company’s commitment to an exit plan, and severance pay in many cases be recognized over time rather than up front. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the consolidated earnings or financial position of the Company. In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”),  Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 . FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 requires the initial disclosure of applicable guarantees in all issuances of financial statements of interim or annual periods ending after December 15, 2002. The additional provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The Company has adopted the disclosure provisions required by FIN 45 in its consolidated financial statements for the year ended December 31, 2002, and will adopt the recognition and measurement provisions for new or modified contracts subsequent to December 31, 2002. See Note P, Commitments, Contingencies and Guarantees, for discussion of special purpose vehicles used in synthetic lease transactions.  In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148,  Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of SFAS No. 123 , (“SFAS 148”). SFAS 148 amends current guidance to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock- based employee compensation. The statement also amends the disclosure requirements of SFAS No. 123,  Accounting for Stock-Based Compensation (“SFAS 123”), to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company has adopted and incorporated the applicable disclosure provisions of SFAS 148 in its consolidated financial statements for the year ended December 31, 2002. Replacement of SFAS No. 125 (“SFAS 140”), are accomplished through qualifying special purpose entities and such transactions are not subject to the provisions of FIN 46. The Company is currently evaluating FIN 46 and the corresponding impact to its financial statements. 52