NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reporting requirements under Section 16(a) of the Securities Exchange Act of 1934. Only the Committee may
exercise authority in respect of Awards granted to such participants.
The Omnibus Plan replaced and superseded the Oriental Financial Group Inc. 1996, 1998 and 2000 Incentive Stock
Option Plans (the “Stock Option Plans”). All outstanding stock options under the Stock Option Plans continue in
full force and effect, subject to their original terms and conditions.
The Group follows the fair value method of recording stock-based compensation. Effective July 1, 2005, the Group
adopted SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), an amendment of SFAS No. 123 “Accounting
for Stock-Based Compensation” using the modified prospective transition method. SFAS 123R requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grantdate fair value of the award with the cost to be recognized over the service period. SFAS No. 123R applies to all
awards unvested and granted after this effective date and awards modified, repurchased, or cancelled after that date.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions
and other events and circumstances, except for those resulting from investments by owners and distributions to
owners. GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and on
derivative activities that qualify and are designated for cash flows hedge accounting, are reported as a separate
component of the stockholders’ equity section of the consolidated statements of financial condition, such items,
along with net income, are components of comprehensive income.
Evaluation of Prior Year Misstatements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108
provides the SEC staff’s views regarding the process of quantifying financial statement misstatements. It requires
the use of two different approaches to quantifying misstatements — (1) the “rollover approach” and (2) the “iron
curtain approach” — when assessing whether such a misstatement is material to the current period financial
statements. The rollover approach focuses on the impact on the income statement of a misstatement originating in
the current reporting period. The iron curtain approach focuses on the cumulative effect on the balance sheet as of
the end of the current reporting period of uncorrected misstatements regardless of when they originated. If a
material misstatement is quantified under either approach, after considering quantitative and qualitative factors, the
financial statements would require adjustment. Depending on the magnitude of the correction with respect to the
current period financial statements, changes to financial statements for prior periods could result. SAB 108 was
effective for the Group on January 1, 2006.
The Group had three unrecorded accounting adjustments that were considered in the SAB 108 analysis. The Group
historically deferred commissions to certain employees as part of the Bank’s deposit-gathering campaigns, instead
of charging compensation expenses in the year paid. The balance of deferred commission as of January 1, 2006, was
$719,000 and was corrected as of January 1, 2006, as a credit to cumulative retained earnings at that date.
The second accounting adjustment was the reversal of a prior year over-accrual of income taxes. As of December 31,
2005, utilizing the rollover method to evaluate differences, the Group decided not to correct $589,000 of excess
income taxes provision. Such difference was corrected as of January 1, 2006, against cumulative retained earnings
at that date.
The third accounting adjustment was the Group’s method of recognizing interest on a structured note carried as
held-to-maturity investment. The structured note pays interest depending on whether LIBOR is within a range or
not. In the past, the Group had recorded interest on such note on a cash basis instead of using the retrospective
interest method required by Financial Accounting Standards Board Emerging Issues Task Force Abstracts Issue
No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structured Notes”. As a result of
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