Capital One 2013 Annual Report Download - page 174

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
unobservable. Fair value measurement of a financial asset or liability is assigned to a level based on the lowest
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, 2013, 2012 and 2011. See “Note 18—Fair
Value of Financial Instruments” for additional information.
Accounting for Acquisitions
We account for business combinations under the acquisition method of accounting. Under the acquisition
method, tangible and intangible 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 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.
If the acquired set of activities and assets does not meet the accounting definition of a business, the transaction is
accounted for as an asset acquisition. In an asset acquisition, the assets acquired are recorded at the purchase
price plus any transaction costs incurred and, therefore, no goodwill is recognized.
Accounting Standards Adopted in 2013
New Benchmark Interest Rate for Hedge Accounting Purposes
In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance permitting the use of the Fed
Funds Effective Swap Rate (or Overnight Index Swap Rate, “OIS”) as a benchmark interest rate for hedge
accounting purposes. The addition of OIS expands the number of benchmark interest rates to three, including the
US Treasury rate and London Interbank Offered Rate swap rate. The guidance also removes the previous
restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or
redesignated hedging relationships entered into on or after July 17, 2013. See “Note 10—Derivative Instruments
and Hedging Activities” for further details regarding the impact derivative contracts designated as qualifying
accounting hedges have on our financial condition and results of operations.
Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income
In February 2013, the FASB issued new guidance requiring an entity to report the effect of significant
reclassifications out of accumulated other comprehensive income on the respective line items in net income if the
amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. The new
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