Ally Bank 2011 Annual Report Download - page 141

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
hedges, the effective portion of the change in the fair value of the derivative financial instruments is recorded in accumulated other comprehensive income,
and recognized in the income statement when the hedged cash flows affect earnings. For a derivative designated as hedging the foreign−currency exposure
of a net investment in a foreign operation, the gain or loss is reported in accumulated other comprehensive income as part of the cumulative translation
adjustment. The ineffective portions of fair value, cash flow, and net investment hedges are immediately recognized in earnings, along with the portion of
the change in fair value that is excluded from the assessment of hedge effectiveness, if any.
The hedge accounting treatment described herein is no longer applied if a derivative financial instrument is terminated or the hedge designation is
removed or is assessed to be no longer highly effective. For these terminated fair value hedges, any changes to the hedged asset or liability remain as part of
the basis of the asset or liability and are recognized into income over the remaining life of the asset or liability. For terminated cash flow hedges, unless it is
probable that the forecasted cash flows will not occur within a specified period, any changes in fair value of the derivative financial instrument previously
recognized remain in accumulated other comprehensive income, and are reclassified into earnings in the same period that the hedged cash flows affect
earnings. The previously recognized net derivative gain or loss for a net investment hedge continues to remain in accumulated other comprehensive income
until earnings are impacted by sale or liquidation of the associated foreign operation. In all instances, after hedge accounting is no longer applied, any
subsequent changes in fair value of the derivative instrument will be recorded into earnings.
Changes in the fair value of derivative financial instruments held for risk management purposes that are not designated for hedge accounting under
GAAP and changes in the fair value of derivative financial instruments held for trading purposes are reported in current period earnings.
Loan Commitments
We enter into commitments to purchase and make loans whereby the interest rate on the loans is set prior to funding (i.e., interest rate lock
commitments). Interest rate lock commitments for mortgage loans to be originated for sale and all purchase commitments are derivative financial
instruments carried at fair value in accordance with applicable accounting standards with changes in fair value included within current period earnings. The
fair value of purchase and interest rate lock commitments include expected net future cash flows related to the associated servicing of the loan. Servicing
assets are recognized as distinct assets once they are contractually separated from the underlying loan by sale or securitization. Day−one gains or losses on
derivative interest rate lock commitments are recognized when applicable.
Income Taxes
Effective June 30, 2009, we converted from an LLC to a Delaware corporation, thereby ceasing to be a pass−through entity for income tax purposes.
As a result, we recorded our deferred tax assets and liabilities using the estimated corporate effective tax rate. Our banking, insurance, and foreign
subsidiaries were generally always corporations and continued to be subject to tax and provide for U.S. federal, state, and foreign income taxes.
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of
estimated future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and
estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our
ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future
taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate
assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies. For additional information regarding our provision for income taxes, refer to Note 25.
We recognize the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the
position will be sustained upon examination. Also, we recognize accrued interest and penalties related to uncertain income tax positions in interest expense
and other operating expenses, respectively.
Share−based Compensation
Under accounting guidance for share−based compensation, compensation cost recognized includes cost for share−based awards. For certain
share−based awards compensation cost is ratably charged to expense over the applicable service periods. For other share−based awards the awards require
liability treatment and are remeasured quarterly at fair value until they are paid, with changes in fair value charged to compensation expense in the period in
which the change occurs. Refer to Note 26 for a discussion of our share−based compensation plans.
Foreign Exchange
Foreign−denominated assets and liabilities resulting from foreign−currency transactions are valued using period−end foreign−exchange rates and the
results of operations and cash flows are determined using approximate weighted average exchange rates for the period. Translation adjustments are related
to foreign subsidiaries using local currency as their functional currency and are reported as a separate component of accumulated other comprehensive
income. We may elect to enter into foreign−currency derivatives to mitigate our exposure to changes in foreign−exchange rates. Refer to Derivative
Instruments and Hedging Activities above for a discussion of our hedging activities of the foreign−currency exposure of a net investment in a foreign
operation.
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