Capital One 2011 Annual Report Download - page 71

determined as the excess of the fair value of the consideration transferred, plus the fair value of any
noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of
the acquisition date. We had goodwill of $13.6 billion recorded on our consolidated balance sheets as of
December 31, 2011 and 2010, respectively. Other intangible assets consist primarily of core deposit intangibles.
Other intangible assets, which we report on our consolidated balance sheets as a component of other assets,
totaled $610 million and $733 million as of December 31, 2011 and 2010, respectively. Goodwill and other
intangible assets together represented 7% of our total assets as of December 31, 2011 and 2010.
Goodwill is not amortized but must be allocated to reporting units and tested for impairment on an annual basis
or in interim periods if events or circumstances indicate potential impairment. A reporting unit is a business
segment or one level below. Our reporting units for purposes of goodwill impairment testing are Domestic Card,
International Card, Auto Finance, other Consumer Banking and Commercial Banking. We perform our annual
goodwill impairment test for all reporting units as of October 1 each year using a two-step process. First, we
compare the fair value of each reporting unit to its current carrying amount, including goodwill. If the fair value
of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and
no further analysis is necessary. If, however, the carrying value of the reporting unit exceeds the fair value, there
is an indication of potential impairment and a second step of testing is performed to measure the amount of
impairment, if any, for that reporting unit.
Estimating the fair value of reporting units and the assets, liabilities and intangible assets of a reporting unit is a
subjective process that involves the use of estimates and judgments, particularly related to cash flows, the
appropriate discount rates and an applicable control premium. Management judgment is required to assess
whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting
unit. There are widely accepted valuation methodologies, such as the market approach (earnings multiples and/or
transaction multiples) and/or discounted cash flow methods, that are used to estimate the fair value of reporting
units. In applying these methodologies, we utilize a number of factors, including actual operating results, future
business plans, economic projections, and market data. We also may engage an independent valuation specialist
to assist in our valuation process.
In estimating the fair value of the reporting units in step one of the goodwill impairment analyses, fair values can
be sensitive to changes in the projected cash flows and assumptions. In some instances, minor changes in the
assumptions could impact whether the fair value of a reporting unit is greater than its carrying amount.
Furthermore, a prolonged decrease or increase in a particular assumption could eventually lead to the fair value
of a reporting unit being less than its carrying amount. Also, to the extent step two of the goodwill analyses is
required, changes in the estimated fair values of individual assets and liabilities may impact other estimates of
fair value for assets or liabilities and result in a different amount of implied goodwill, and ultimately the amount
of goodwill impairment, if any.
In conducting our goodwill impairment test for 2011, we determined the fair value of our reporting units using a
discounted cash flow analysis, a form of the income approach. Our discounted cash flow analysis required
management to make judgments about future loan and deposit growth, revenue growth, credit losses, and capital
rates. We relied on each reporting unit’s internal cash flow forecast and calculated a terminal value using a
growth rate that reflected the nominal growth rate of the economy as a whole and appropriate discount rates for
the respective reporting units. We adjusted cash flows as necessary to maintain each reporting unit’s equity
capital requirements. The cash flows were discounted to present value using reporting unit specific discount rates
that were largely based on our external cost of equity, adjusted for risks inherent in each reporting unit. We
corroborated the key inputs used in our discounted cash flow analysis with market data, where available, to
validate that our assumptions were within a reasonable range of observable market data.
Based on the results of step one of our 2011 goodwill impairment test, we determined that the fair value of each
of our reporting units, including goodwill, significantly exceeded the carrying value for each reporting unit. Fair
value as a percentage of carrying value for our five reporting units ranged from 118% to 243%, with the
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