Capital One 2012 Annual Report Download - page 175

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value
hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or
liabilities
Level 3: Unobservable inputs
The accounting guidance for fair value requires that we maximize the use of observable inputs and minimize the
use of unobservable inputs in determining fair value. Accounting guidance provides for the irrevocable option to
elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception
of the contract and record any subsequent changes in fair value into earnings. We have not made any material fair
value option elections as of and for the years ended December 31, 2012 and 2011. See “Note 19—Fair Value of
Financial Instruments” for additional information.
Accounting for Acquisitions
We account for acquisitions in accordance with the accounting guidance for business combinations. Under the
guidance for business combinations, the accounting differs depending on whether the acquired set of activities
and assets meets the definition of a business. A business is considered to be an integrated set of activities and
assets that is capable of being conducted and managed for the purpose of providing economic benefits directly to
investors or other owners, members, or participants. If the acquired set of activities and assets meets the
definition of a business, the transaction is accounted for as a business combination. Otherwise, it is accounted for
as an asset acquisition.
In a business combination, identifiable assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree are recorded at fair value as of the acquisition date, with limited exceptions. Transaction costs and costs
to restructure the acquired company are generally expensed as incurred. Goodwill is recognized as the excess of
the acquisition price over the estimated fair value of the net assets acquired. Likewise, if the fair value of the net
assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and recorded in non-
interest income. The operating results of the acquired business are reflected in our consolidated financial
statements subsequent to the date of the merger or acquisition. In an asset acquisition, the assets acquired are
recorded at the purchase price plus any transaction costs incurred. Goodwill is not recognized in an asset
acquisition.
Accounting Standards Adopted in 2012
Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a
Government-Assisted Acquisition of a Financial Institution
In October 2012, the Financial Accounting Standards Board (“FASB”) issued guidance explaining how to
account for the subsequent decrease in cash flows associated with an indemnification asset arising from a
government-assisted acquisition of a financial institution. Although we have not participated in a government-
assisted acquisition, we have applied this guidance, by analogy, to indemnification assets recognized in
conjunction with other business combinations. The guidance explains that any subsequent decrease in cash flows
associated with an indemnification asset should be amortized over the shorter of the life of the covered loans or
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