Ally Bank 2014 Annual Report Download - page 112

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
100
Earnings per Common Share
We compute basic earnings (loss) per common share by dividing net income (loss) from continuing operations attributable to common
shareholders after deducting dividends on preferred stock by the weighted-average number of common shares outstanding during the period.
We compute diluted earnings (loss) per common share by dividing net income (loss) from continuing operations after deducting dividends on
preferred stock by the weighted-average number of common shares outstanding during the period plus the dilution resulting from incremental
shares that would have been outstanding if the dilutive potential common shares had been issued (assuming it does not have the effect of
antidilution), if applicable.
Derivative Instruments and Hedging Activities
We primarily use derivative instruments for risk management purposes. Some of our derivative instruments are designated in qualifying
hedge accounting relationships; other derivative instruments do not qualify for hedge accounting or are not elected to be designated in a
qualifying hedging relationship. In accordance with applicable accounting standards, all derivative financial instruments, whether designated
for hedge accounting or not, are required to be recorded on the balance sheet as assets or liabilities and measured at fair value. Additionally,
we report derivative financial instruments on the Consolidated Balance Sheet primarily on a gross basis. For additional information on
derivative instruments and hedging activities, refer to Note 22.
At inception of a hedge accounting relationship, we designate each qualifying derivative financial instrument as a hedge of the fair value
of a specifically identified asset or liability (fair value hedge); as a hedge of the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge); or as a hedge of the foreign-currency exposure of a net investment in a foreign operation (net
investment hedge). We formally document all relationships between hedging instruments and hedged items and risk management objectives
for undertaking various hedge transactions. Both at the hedge's inception and on an ongoing basis, we formally assess whether the derivatives
that are used in hedging relationships are highly effective in offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges along with the gain or
loss on the hedged asset or liability attributable to the hedged risk, are recorded in the current period earnings. For qualifying cash flow
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 qualifying net investment
hedge, 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 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 are reported in current period earnings.
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 predominantly in the United States. 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.
We recognize the financial statement effects of uncertain income tax positions 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 liabilities for
uncertain income tax positions in interest expense and other operating expenses, respectively. For additional information regarding our
provision for income taxes, refer to Note 23.
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