previously unconsolidated entities or de-consolidating previously consolidated entities under Interpretation No. 46 represents an accounting change, it does not affect Key’s legal rights or obligations. Interpretation No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. See Note 8 for more detailed information pertaining to Key’s adoption of Interpretation No. 46 and involvement with VIEs. Additional information pertaining to VIEs is included in Note 18 (“Commitments, Contingent Liabilities and Guarantees”), which begins on page 77. 

In December 2003, the FASB issued an interpretation that supersedes Interpretation No. 46 (Revised Interpretation No. 46). Revised Interpretation No. 46 will be adopted by Key in the first quarter of 2004 and is summarized in the “Accounting Pronouncements Pending Adoption” section of this note. 

Accounting for and disclosure of guarantees. In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of obligations undertaken. The initial recognition and measurement provisions of this guidance became effective on a prospective basis for guarantees issued or modified on or after January 1, 2003. 

If Key receives a fee for a guarantee subject to these liability recognition provisions, the initial fair value “stand ready” obligation is recognized at an amount equal to the fee. If Key does not receive a fee, the fair value of the “stand ready” obligation is determined using expected present value measurement techniques, unless observable transactions for identical or similar guarantees are available. The subsequent accounting for these stand ready obligations depends on the nature of the underlying guarantees. Key accounts for its release from risk for a particular guarantee either upon expiration or settlement, or by a systematic and rational amortization method depending on the risk profile of the particular guarantee. 

This new accounting guidance also expands the disclosures that a guarantor must make about its obligations under certain guarantees. These disclosure requirements took effect for financial statements of interim or annual periods ending after October 15, 2002. The required disclosures for Key are provided in Note 18 under the heading “Guarantees” on page 78. The adoption of Interpretation No. 45 did not have any material effect on Key’s financial condition or results of operations. 

Accounting for stock-based compensation. As discussed under the heading “Stock-Based Compensation” on page 54, effective January 1, 2003, Key adopted the fair value method of accounting as outlined in SFAS No. 123. Management is applying the change in accounting prospectively to all awards as permitted under the transition provisions in SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 to provide three alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock compensation: (i) the prospective method chosen by Key; (ii) the modified prospective method; and, (iii) the retroactive restatement method. This accounting guidance also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both 

annual and interim financial statements about the method of accounting for stock compensation and the effect of the method used on reported financial results. The required disclosures for Key are provided under the aforementioned “Stock-Based Compensation” heading. 

The accounting change reduced Key’s diluted earnings per common share by less than $.02 in 2003. The effect on Key’s earnings per common share in future years will depend on the number and timing of options granted and the assumptions used to estimate their fair value. Management currently anticipates that the negative effect on Key’s earnings per common share in 2004 will be approximately $.04. 

Costs associated with exit or disposal activities. In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Effective December 31, 2002, SFAS No. 146 substantially changed the rules for recognizing costs, such as lease or other contract termination costs and one-time employee termination benefits, associated with exit or disposal activities arising from corporate restructurings. Generally, these costs must be recognized when incurred. Previously, those costs could be recognized earlier, such as when a company committed to cease a line of business or relocate operations. The adoption of SFAS No. 146 did not have any material effect on Key’s financial condition or results of operations. 

Asset retirement obligations. In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires a liability to be recognized for the fair value of legal obligations associated with the retirement of tangible long-lived assets in the period they are incurred. Related costs are capitalized as part of the carrying amounts of the assets to be retired and are amortized over the assets’ useful lives. Key adopted SFAS No. 143 as of January 1, 2003. The adoption of this accounting guidance did not have any material effect on Key’s financial condition or results of operations. 

## ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION 

Consolidation of variable interest entities. In December 2003, the FASB issued modifications to Interpretation No. 46 (Revised Interpretation No. 46) to provide additional scope exceptions, address certain implementation issues and promote a more consistent application of the Interpretation No. 46 provisions. Revised Interpretation No. 46 supersedes Interpretation No. 46 and will be adopted by Key in the first quarter of 2004. Management is evaluating the effect on Key’s financial condition and results of operations of adopting this guidance, but currently expects that any effect will not be material. 

Accounting for certain loans or debt securities acquired in a transfer. In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued a Statement of Position that addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (structured as loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. As required by this pronouncement, Key will adopt this guidance for loans acquired after December 31, 2004. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations. 

