Ally Bank 2012 Annual Report Download - page 121

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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 11 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 expense for operating lease assets 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 13 for further discussion on goodwill.
Investment in Operating Leases
Investment in operating leases represents the automobiles that are underlying the leases and 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. Manufacturer support payments that we receive 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. At contract inception, we generally determine the projected residual values based
on independent data, including independent guides of vehicle residual values, and analysis. 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 an account is determined to be uncollectible, at the earliest of time of repossession, within 60 days of bankruptcy notification and
greater than 60 days past due, or greater than 120 days past due.
When a lease vehicle is returned to us, the asset is reclassified from investment in operating leases, net, to other assets and recorded at
the lower-of-cost or estimated fair value, less costs to sell, on our Consolidated Balance Sheet.
Impairment of Long-lived Assets
The carrying value of long-lived assets (including property and equipment) are evaluated for impairment whenever events or changes in
circumstances indicate that their carrying values may not be recoverable from the estimated undiscounted future cash flows expected to result
from their use and eventual disposition. Recoverability of assets to be held and used is measured by a comparison of their carrying amount to
future net undiscounted cash flows expected to be generated by the assets. If these 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. No material
impairment was recognized in 2012, 2011, or 2010.
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K