Citibank 2009 Annual Report Download - page 115

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Note 1 to the Consolidated Financial Statements contains a summary of
Citigroup’s significant accounting policies, including a discussion of recently
issued accounting pronouncements. These policies, as well as estimates made
by management, are integral to the presentation of the company’s financial
condition. While all of these policies require a certain level of management
judgment and estimates, this section highlights and discusses the significant
accounting policies that require management to make highly difficult,
complex, or subjective judgments and estimates, at times regarding matters
that are inherently uncertain and susceptible to change. Management has
discussed each of these significant accounting policies, the related estimates,
and its judgments with the Audit Committee of the Board of Directors.
Additional information about these policies can be found in Note 1 to the
Consolidated Financial Statements.
VALUATIONS OF FINANCIAL INSTRUMENTS
Citigroup holds fixed-income and equity securities, derivatives, retained
interests in securitizations, investments in private equity, and other financial
instruments. In addition, Citigroup purchases securities under agreements
to resell and sells securities under agreements to repurchase. Citigroup holds
its investments, trading assets and liabilities, and resale and repurchase
agreements on the balance sheet to meet customer needs, to manage
liquidity needs and interest rate risks, and for proprietary trading and private
equity investing.
Substantially all of the assets and liabilities described in the preceding
paragraph are reflected at fair value on Citigroup’s balance sheet. In
addition, certain loans, short-term borrowings, long-term debt and
deposits as well as certain securities borrowed and loaned positions that are
collateralized with cash are carried at fair value. Approximately 37.6% and
34.2% of total assets, and 16.5% and 20.4% of total liabilities, are accounted
for at fair value as of December 31, 2009 and 2008, respectively.
When available, Citi generally uses quoted market prices to determine
fair value and classifies such items within Level 1 of the fair value hierarchy
established under ASC 820-10, Fair Value Measurements and Disclosures
(see Note 26 to the Consolidated Financial Statements). If quoted market
prices are not available, fair value is based upon internally developed
valuation models that use, where possible, current market-based or
independently sourced market parameters, such as interest rates, currency
rates, option volatilities, etc. Where a model is internally developed and
used to price a significant product, it is subject to validation and testing by
independent personnel. Such models are often based on a discounted cash
flow analysis.
Items valued using such internally generated valuation techniques are
classified according to the lowest level input or value driver that is significant
to the valuation. Thus, an item may be classified in Level 3 even though
there may be some significant inputs that are readily observable.
As seen during the second half of 2007, the credit crisis has caused
some markets to become illiquid, thus reducing the availability of certain
observable data used by Citigroup’s valuation techniques. This illiquidity
continued through 2008 and 2009. When or if liquidity returns to these
markets, the valuations will revert to using the related observable inputs
in verifying internally calculated values. For additional information on
Citigroup’s fair value analysis, see “Managing Global Risk” and “Balance
Sheet Review.”
Recognition of Changes in Fair Value
Changes in the valuation of the trading assets and liabilities, as well as all
other assets (excluding available-for-sale securities) and liabilities carried at
fair value are recorded in the Consolidated Statement of Income. Changes in
the valuation of available-for-sale securities, other than write-offs and credit
impairments, generally are recorded in Accumulated other comprehensive
income (loss) (AOCI), which is a component of Stockholders’ equity on
the Consolidated Balance Sheet. A full description of Citi’s related policies
and procedures can be found in Notes 1, 26, 27 and 28 to the Consolidated
Financial Statements.
Evaluation of Other-than-Temporary Impairment
Citigroup’s conducts and documents periodic reviews of all securities
with unrealized losses to evaluate whether the impairment is other than
temporary. Prior to January 1, 2009 these reviews were conducted pursuant
to FSP FAS 115-2 and FAS 124-2 (now ASC 320-10-35, Investments—Debt
and Equity Securities: Subsequent Measurement). Any unrealized loss
identified as other than temporary was recorded directly in the Consolidated
Statement of Income. As of January 1, 2009, Citigroup adopted ASC 320-10.
Accordingly, any credit-related impairment related to debt securities that Citi
does not plan to sell and is not likely to be required to sell is recognized in the
Consolidated Statement of Income, with the non-credit-related impairment
recognized in AOCI. For other impaired debt securities, the entire impairment
is recognized in the Consolidated Statement of Income. An unrealized loss
exists when the current fair value of an individual security is less than its
amortized cost basis. Unrealized losses that are determined to be temporary
in nature are recorded, net of tax, in AOCI for available-for-sale securities,
while such losses related to held-to-maturity securities are not recorded, as
these investments are carried at their amortized cost (less any other-than-
temporary impairment). For securities transferred to held-to-maturity from
Trading account assets, amortized cost is defined as the fair value amount
of the securities at the date of transfer. For securities transferred to held-to-
maturity from available-for-sale, amortized cost is defined as the original
purchase cost, plus or minus any accretion or amortization of interest, less
any impairment recognized in earnings.
Regardless of the classification of the securities as available-for-sale or
held-to-maturity, Citi has assessed each position for credit impairment.
For a further discussion, see Note 16 to the Consolidated Financial
Statements.