Ally Bank 2011 Annual Report Download - page 138

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
distribution of those funds to investors in mortgage− and asset−backed securities and whole−loans packages. We also purchase and sell primary and
master−servicing rights through transactions with other market participants.
We capitalize the value expected to be realized from performing specified mortgage servicing activities for others as mortgage servicing rights (MSRs)
when the expected future cash flows from servicing are projected to be more than adequate compensation for such activities. These capitalized servicing
rights are purchased or retained upon sale or securitization of mortgage loans. MSRs are not recorded on securitizations accounted for as secured financings.
We measure all mortgage servicing assets and liabilities at fair value. We define our servicing rights based on both the availability of market inputs
and the manner in which we manage the risks of our servicing assets and liabilities. We leverage all available relevant market data to determine the fair
value of our recognized servicing assets and liabilities.
Since quoted market prices for MSRs are not readily available, we estimate the fair value of MSRs by determining the present value of future expected
cash flows using modeling techniques that incorporate management's best estimates of key variables including expected cash flows, prepayment speeds, and
return requirements commensurate with the risks involved. Cash flow assumptions are modeled using our internally forecasted revenue and expenses, and
where possible, the reasonableness of assumptions is periodically validated through comparisons to market data. Prepayment speed estimates are determined
from historical prepayment rates on similar assets or obtained from third−party data. Return requirement assumptions are determined using data obtained
from market participants, where available, or based on current relevant interest rates plus a risk−adjusted spread. We also consider other factors that can
impact the value of the MSRs, such as surety provider termination clauses and servicer terminations that could result if we failed to materially comply with
the covenants or conditions of our servicing agreements and did not remedy the failure. Since many factors can affect the estimate of the fair value of
MSRs, we regularly evaluate the major assumptions and modeling techniques used in our estimate and review these assumptions against market
comparables, if available. We monitor the actual performance of our MSRs by regularly comparing actual cash flow, credit, and prepayment experience to
modeled estimates. Refer to Note 12 for further discussion of our servicing activities.
Repossessed and Foreclosed Assets
Assets are classified as repossessed and foreclosed and included in other assets when physical possession of the collateral is taken regardless of
whether foreclosure proceedings have taken place. Repossessed and foreclosed assets are carried at the lower of the outstanding balance at the time of
repossession or foreclosure or the fair value of the asset less estimated costs to sell. Losses on the revaluation of repossessed and foreclosed assets are
charged to the allowance for loan losses at the time of repossession. Declines in value after repossession are charged to other operating expenses for loans
and depreciation on operating lease assets for lease contracts as incurred.
Goodwill and Other Intangibles
Goodwill and other intangible assets, net of accumulated amortization, are reported in other assets. In accordance with applicable accounting
standards, goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired, including identifiable intangibles. Goodwill
is reviewed for impairment utilizing a two−step process. The first step of the impairment test requires us to define the reporting units and compare the fair
value of each of these reporting units to the respective carrying value. The fair value of the reporting units in our impairment test is determined based on
various analyses including discounted cash flow projections using assumptions a market participant would use. If the carrying value is less than the fair
value, no impairment exists, and the second step does not need to be completed. If the carrying value is higher than the fair value or there is an indication
that impairment may exist, a second step must be performed to compute the amount of the impairment, if any. Applicable accounting standards require
goodwill to be tested for impairment annually at the same time every year and whenever an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. Our annual goodwill impairment assessment is performed as of August 31 of
each year. Refer to Note 14 for further discussion on goodwill.
Investment in Operating Leases
Investment in operating leases is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs.
Depreciation of vehicles is generally provided on a straight−line basis to an estimated residual value over the lease term. Rate support payments that we
receive from manufacturers are treated as a reduction to the cost−basis in the underlying lease asset and are recognized over the life of the contract as a
reduction to depreciation expense. We periodically evaluate our depreciation rate for leased vehicles based on projected residual values. Income from
operating lease assets that includes lease origination fees, net of lease origination costs, is recognized as operating lease revenue on a straight−line basis over
the scheduled lease term.
We have significant investments in the residual values of assets in our operating lease portfolio. The residual values represent an estimate of the values
of the assets at the end of the lease contracts and are initially determined based on residual values established at contract inception by consulting
independently published residual value guides. Realization of the residual values is dependent on our future ability to market the vehicles under the
prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and may make adjustments to the
depreciation rates to the extent the expected value of the vehicle (including any residual support payments) at lease termination changes. In addition to
estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent
necessary based on market considerations and portfolio characteristics. Impairment is determined to exist if the undiscounted expected future cash flows are
lower than the carrying value of the asset. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which
the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. The accrual of revenue on operating leases is generally
discontinued at the time
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