Citibank 2011 Annual Report Download - page 138

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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 results of 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, Citi purchases securities under agreements to resell
(reverse repos) and sells securities under agreements to repurchase (repos).
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 Citi’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 38.8% and
37.3% of total assets, and 15.7% and 16.6% of total liabilities, were accounted
for at fair value as of December 31, 2011 and 2010, 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 and option volatilities. 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 Citi’s valuation techniques.
This illiquidity, in at least certain markets, continued through 2011. 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.”
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 policies and procedures relating to
recognition of changes in fair value can be found in Notes 1, 25, 26 and 27 to
the Consolidated Financial Statements.
Evaluation of Other-than-Temporary Impairment
Citi conducts and documents periodic reviews of all securities with unrealized
losses to evaluate whether the impairment is other-than-temporary. Under
the guidance for debt securities, other-than-temporary impairment (OTTI)
is recognized in earnings in the Consolidated Statement of Income for debt
securities that Citi has an intent to sell or that Citi believes it is more likely
than not that it will be required to sell prior to recovery of the amortized
cost basis. For those securities that Citi does not intend to sell or expect to be
required to sell, credit-related impairment is recognized in earnings, with the
non-credit-related impairment recorded in AOCI.
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 plus
any accretion income and less any impairments recognized in earnings
subsequent to 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 a purchase discount or
premium, less any impairment recognized in earnings.