Citibank 2009 Annual Report Download - page 120

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GOODWILL
Citigroup has recorded on its Consolidated Balance Sheet Goodwill of $25.4
billion (1.4% of assets) and $27.1 billion (1.4% of assets) at December 31,
2009 and December 31, 2008, respectively. No goodwill impairment was
recorded during 2009. The December 31, 2008 balance is net of a $9.6
billion goodwill impairment charge recorded as a result of testing performed
as of December 31, 2008. The impairment was composed of a $2.3 billion
pretax charge ($2.0 billion after tax) related to North America Regional
Consumer Banking, a $4.3 billion pretax charge ($4.1 billion after tax)
related to Latin America Regional Consumer Banking, and a $3.0 billion
pretax charge ($2.6 billion after tax) related to Local Consumer Lending—
Other.
The primary cause for the goodwill impairment in the above reporting
units was the rapid deterioration in the financial markets as well as in
the global economic outlook, particularly during the period beginning
mid-November through year-end 2008. This deterioration further weakened
the near-term prospects for the financial services industry. The following
summary describes Citigroup’s process for accounting for goodwill and
testing for impairment.
Goodwill is allocated to the reporting units at the date the goodwill is
initially recorded. Once goodwill has been allocated to the reporting units,
it generally no longer retains its identification with a particular acquisition,
but instead becomes identified with the reporting unit as a whole. As a result,
all of the fair value of each reporting unit is available to support the value of
goodwill allocated to the unit. As of December 31, 2009, Citigroup operated
in three core business segments, as discussed. Goodwill impairment testing is
performed at the reporting unit level, one level below the business segment.
The changes in the organizational structure in 2009 resulted in the
creation of new reporting segments. As a result, commencing with the second
quarter 2009, Citi identified new reporting units as required under ASC 350,
Intangibles—Goodwill and Other. Goodwill affected by the reorganization
has been reassigned from 10 reporting units to nine, using a fair value
approach. Subsequent to July 1, 2009, goodwill was allocated to disposals and
tested for impairment under the new reporting units. The nine new reporting
units, which remain unchanged at December 31, 2009, are North America
Regional Consumer Banking, EMEA Regional Consumer Banking, Asia
Regional Consumer Banking, LATAM Regional Consumer Banking,
Securities and Banking, Transaction Services, Brokerage and Asset
Management, Local Consumer Lending—Cards and Local Consumer
Lending—Other.
Under ASC 350, the goodwill impairment analysis is done in two steps.
The first step requires a comparison of the fair value of the individual
reporting unit to its carrying value 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
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.
When required, the second step of testing involves calculating the implied
fair value of goodwill for each of the affected reporting units. The implied
fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination, which is the excess of the
fair value of the reporting unit determined in step one over the fair value
of the net assets and identifiable intangibles as if the reporting unit were
being acquired. If the amount of the goodwill allocated to the reporting unit
exceeds the implied fair value of the goodwill in the pro forma purchase price
allocation, an impairment charge is recorded for the excess. A reorganized
impairment charge subsequently cannot exceed the amount of goodwill
allocated to a reporting unit and cannot be reversed even if the fair value of
the reporting unit recovers.
Goodwill impairment testing involves management judgment, requiring
an assessment of whether the carrying value of the reporting unit can be
supported by the fair value of the individual reporting unit using widely
accepted valuation techniques, such as the market approach (earnings
multiples and/or transaction multiples) and/or discounted cash flow
methods (DCF). In applying these methodologies, Citi utilizes a number of
factors, including actual operating results, future business plans, economic
projections, and market data. A combination of methodologies is used and
weighted appropriately for reporting units with significant adverse changes
in business climate. Management may engage an independent valuation
specialist to assist in Citi’s valuation process.
Prior to 2008, Citi primarily employed the market approach for estimating
fair value of the reporting units. As a result of significant adverse changes
during 2008 in certain of Citigroup reporting units, and the increase in
financial sector volatility primarily in the U.S., Citigroup engaged the services
of an independent valuation specialist to assist in Citi’s valuation of all or
a portion of the following reporting units during 2009—North America
Regional Consumer Banking, Latin America Regional Consumer
Banking, Securities and Banking, Local Consumer Lending—Cards
and Local Consumer Lending—Other. The DCF method was incorporated
to ensure reliability of results. Citi believes that the DCF method, using
management projections for the selected reporting units and an appropriate
risk-adjusted discount rate, is most reflective of a market participant’s view
of fair values given current market conditions. For the reporting units where
both methods were utilized in 2009, the resulting fair values were relatively
consistent and appropriate weighting was given to outputs from both
methods.