Ally Bank 2012 Annual Report Download - page 91

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Goodwill
The accounting for goodwill is discussed in Note 1 to the Consolidated Financial Statements. Goodwill is reviewed for potential
impairment at the reporting unit level on an annual basis, as of August 31, or in interim periods if events or circumstances indicate a potential
impairment. Goodwill is allocated to the reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the
reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identified with the reporting
unit as a whole. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
Goodwill impairment testing is performed at the reporting unit level, one level below the business segment. For more information on our
segments, refer to Note 26 to the Consolidated Financial Statements.
Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting
unit can be supported by the fair value of the individual reporting unit using widely accepted valuation techniques, such as the market
approach (earnings, transaction, pricing multiples and/or other market intelligence that would indicate what a market participant would pay)
and the income approach (discounted cash flow methods). In applying these methodologies we utilize a number of factors, including actual
operating results, future business plans, economic projections, and market data. A combination of methodologies is used and weighted
appropriately for each reporting unit. If actual results differ from these estimates, it may have an adverse impact on the valuation of goodwill
that could result in a reduction of the excess over carrying value and possible impairment of goodwill. At December 31, 2012, we did not
have material goodwill at our reporting units that is at risk of failing Step 1 of the goodwill impairment test.
Legal and Regulatory Reserves
Our legal and regulatory reserves reflect management's best estimate of probable losses on legal and regulatory matters. As a legal or
regulatory matter develops, management, in conjunction with internal and external counsel handling the matter, evaluates on an ongoing basis
whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency related
to a legal or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that
would make such loss contingency both probable and estimable. When the loss contingency related to a legal or regulatory matter is deemed
to be both probable and estimable, we will establish a liability with respect to such loss contingency and record a corresponding amount to
other operating expenses. To estimate the probable loss, we evaluate the individual facts and circumstances of the case including information
learned through the discovery process, rulings on dispositive motions, settlement discussions, our prior history with similar matters and other
rulings by courts, arbitrators or others. The reserves are continuously monitored and updated to reflect the most recent information related to
each matter.
Additionally, in matters for which a loss event is not deemed probable, but rather reasonably possible to occur, we would attempt to
estimate a loss or range of loss related to that event, if possible. For these matters, we do not record a liability. However, if we are able to
estimate a loss or range of loss, we would disclose this loss, if it is material to our financial statements. To estimate a range of probable or
reasonably possible loss, we evaluate each individual case in the manner described above. We do not accrue for matters for which a loss event
is deemed remote.
For details regarding the nature of all material contingencies, refer to Note 29 to the Consolidated Financial Statements.
Loan Repurchase and Obligations Related to Loan Sales
The liability for representation and warranty obligations reflects management's best estimate of probable lifetime losses. We consider
historical and recent demand trends in establishing the reserve. The methodology used to estimate the reserve considers a variety of
assumptions including borrower performance (both actual and estimated future defaults), repurchase demand behavior, historical loan defect
experience, historical mortgage insurance rescission experience, and historical and estimated future loss experience, which includes
projections of future home price changes as well as other qualitative factors including investor behavior. In cases where we may not be able to
reasonably estimate losses, a liability is not recognized. Management monitors the adequacy of the overall reserve and makes adjustments to
the level of reserve, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with
counterparties.
Determination of Provision for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best
assessment of estimated current and future taxes to be paid. We are subject to income taxes in both 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
results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued and
deconsolidated operations and incorporate assumptions about the amount of future state, federal and foreign pretax operating income. These
assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage
the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating
income (loss).
Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K