Citibank 2010 Annual Report Download - page 136

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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 Citi’s operations
and 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 Consolidated 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 Consolidated 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 37.3% and
37.6% of total assets, and 16.6% and 16.5% of total liabilities are accounted
for at fair value as of December 31, 2010 and 2009, 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 25 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. In addition, 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.
The credit crisis caused some markets to become illiquid, thus reducing
the availability of certain observable data used by Citigroup’s valuation
techniques. This illiquidity, in at least certain markets, continued through
2010. 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 derivatives in
qualifying cash flow hedging relationships) 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, and the effective portion of changes in the valuation
of derivatives in qualifying cash flow hedging relationships, 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, 25, 26 and 27 to the Consolidated Financial Statements.
Evaluation of Other-than-Temporary Impairment
Citigroup 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 15 to the Consolidated Financial Statements.