Citibank 2010 Annual Report Download - page 140

138
GOODWILL
Citigroup has recorded on its Consolidated Balance Sheet Goodwill
of $26.2 billion (1.4% of assets) and $25.4 billion (1.4% of assets) at
December 31, 2010 and December 31, 2009, respectively. No goodwill
impairment was recorded during 2009 and 2010. A $9.6 billion goodwill
impairment charge was recorded in 2008 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 Bank, a $4.3 billion pretax charge ($4.1 billion after tax) related
to Latin America Regional Consumer Bank and a $3.0 billion pretax
charge ($2.6 billion after tax) related to Local Consumer Lending—Other.
Goodwill is allocated to Citi’s 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, 2010, 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 reporting unit structure in 2010 was consistent with the reporting
units identified in the second quarter of 2009 as a result of the change in
Citi’s organizational structure. During 2010, goodwill was allocated to
disposals and tested for impairment under these reporting units. The nine
reporting units were 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, Intangibles—Goodwill and Other, 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 recognized
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 the income approach
(discounted cash flow (DCF) method). In applying these methodologies, Citi
utilizes a number of factors, including actual operating results, future
business plans, economic projections, and market data. Management
may engage an independent valuation specialist to assist in Citi’s
valuation process.
As a result of significant adverse changes during 2008 in certain 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. In
addition to employing the market approach for estimating the fair value
for the selected reporting units in 2009, the DCF method was incorporated
to ensure reliability of results. Consistent with 2009, Citigroup engaged the
services of an independent valuation specialist in 2010 to assist in Citi’s
valuation of the same reporting units employing both the market approach
and DCF method. 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 2010, the resulting fair values were relatively consistent and
appropriate weighting was given to outputs from both methods.
The DCF method used at the time of each impairment test used discount
rates that Citi believes adequately reflected the risk and uncertainty in the
financial markets generally and specifically in the internally generated cash
flow projections. The DCF method employs a capital asset pricing model in
estimating the discount rate. Citi continues to value the remaining reporting
units where it believes the risk of impairment to be low, using primarily the
market approach.
Citi prepares a formal three-year strategic plan for its businesses on an
annual basis. These projections incorporate certain external economic
projections developed at the point in time the strategic plan is developed. For
the purpose of performing any impairment test, the three-year forecast is
updated by Citi to reflect current economic conditions as of the testing date.
Citi used updated long-range financial forecasts as a basis for its annual
goodwill impairment test performed as of July 1, 2010.