Capital One 2013 Annual Report Download - page 217

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill
The following table presents goodwill attributable to each of our business segments as of December 31, 2013 and
2012.
Table 7.2: Goodwill Attributable to Business Segments
(Dollars in millions)
Credit
Card
Consumer
Banking
Commercial
Banking Total
Balance as of December 31, 2011 ............................ $4,691 $4,583 $4,318 $13,592
Acquisitions ............................................. 304 0 0 304
Other adjustments ......................................... 8 0 0 8
Balance as of December 31, 2012 ............................ $5,003 $4,583 $4,318 $13,904
Acquisitions ............................................. 0 3 70 73
Other adjustments ......................................... 2 (1) 0 1
Balance as of December 31, 2013 ............................ $5,005 $4,585 $4,388 $13,978
Goodwill was not impaired at December 31, 2013 or 2012, nor was any goodwill written off due to impairment
during 2013, 2012 or 2011. The goodwill impairment test, performed at October 1 of each year, is a two-step test.
The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to
the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the
second step of the impairment test is required to measure the amount of any impairment loss.
The fair value of reporting units is calculated using a discounted cash flow model, a form of the income
approach. The model projects cash flows based on each reporting unit’s internal forecast and uses the perpetuity
growth method to calculate terminal values. These cash flows and terminal values are then discounted using
appropriate discount rates, which are largely based on our external cost of equity with adjustments for risk
inherent in each reporting unit. Cash flows are adjusted, as necessary, in order to maintain each reporting unit’s
equity capital requirements. Our discounted cash flow analysis requires management to make judgments about
future loan and deposit growth, revenue growth, credit losses, and capital rates. Discount rates used in 2013 for
the reporting units ranged from 8.0% to 12.5%. The key inputs into the discounted cash flow analysis were
consistent with market data, where available, indicating that assumptions used were within a reasonable range of
observable market data. Based on our analysis, fair value exceeded the carrying amount for all reporting units as
of our annual testing date, therefore, the second step of impairment testing was unnecessary.
As part of the annual goodwill impairment test, we also assess our market capitalization based on the average
market price relative to the aggregate fair value of our reporting units and determined that any excess fair value
in our reporting units at that time could be attributed to a reasonable control premium compared to historical
control premiums seen in the industry.
We calculate the carrying values of our reporting units using an economic capital approach based on each
reporting unit’s specific regulatory capital requirements (reflective of the final Basel III rules released during
2013) and risks. Total reporting unit carrying values for the October 1, 2013 annual goodwill impairment test
were $33.6 billion, compared to total equity of $41.8 billion as of September 30, 2013. The $8.2 billion
remaining equity is primarily attributable to the following items: capital allocated to our Other segment;
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