Capital One 2011 Annual Report Download - page 68

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number
of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and
expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which
we use management judgment and estimates in applying these policies is integral to understanding our financial
statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant
Accounting Policies.”
We have identified the following accounting policies as critical because they require significant judgments and
assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates
and assumptions could have a material impact on our reported results of operations or financial condition. These
critical accounting policies govern:
• Loan loss reserves
• Representation and warranty reserve
• Asset impairment
• Fair value
• Derivative and hedge accounting
• Income taxes
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary
based on changing conditions. Management has reviewed and approved these critical accounting policies and has
discussed these policies with the Audit and Risk Committee of the Board of Directors.
Loan Loss Reserves
We maintain an allowance for loan and lease losses that represents management’s estimate of incurred credit
losses inherent in our held-for investment loan portfolio as of each balance sheet date. We maintain a separate
reserve for the uncollectible portion of billed finance charges and fees on credit card loans.
Allowance for Loan and Lease Losses
We have an established process, using analytical tools, benchmarks and management judgment, to determine our
allowance for loan and lease losses. We calculate the allowance for loan and lease losses by estimating incurred
losses for segments of our loan portfolio with similar risk characteristics. The allowance totaled $4.3 billion as of
December 31, 2011, compared with $5.6 billion as of December 31, 2010.
We generally review and assess our allowance methodologies and adequacy of the allowance for loan and lease
losses on a quarterly basis. Our assessment involves evaluating many factors including, but not limited to,
historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of
bankruptcy filings, the value of collateral underlying secured loans, account seasoning, changes in our credit
evaluation, underwriting and collection management policies, seasonality, general economic conditions, changes
in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in
estimating our allowance for loan and lease losses. Key factors that have a significant impact on our allowance
for loan and lease losses include assumptions about unemployment rates, home prices, and the valuation of
commercial properties, consumer real estate, and autos.
Although we examine a variety of externally available data, as well as our internal loan performance data, to
determine our allowance for loan and lease losses, our estimation process is subject to risks and uncertainties,
including a reliance on historical loss and trend information that may not be representative of current conditions
and indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our
expectations. For example, as a result of improving credit performance trends during 2011 and 2010, charge-offs
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