Citibank 2011 Annual Report Download - page 141

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Where Citi has determined that certain investment vehicles are subject to
the consolidation requirements of SFAS 167, the consolidation conclusions
reached upon initial application of SFAS 167 are consistent with the
consolidation conclusions reached under the requirements of ASC 810-10,
prior to the implementation of SFAS 167.
For additional information, see Notes 1 and 22 to the Consolidated
Financial Statements.
Goodwill
Citigroup has recorded Goodwill of $25.4 billion (1.4% of assets) and $26.2
billion (1.4% of assets) on its Consolidated Balance Sheet at December 31,
2011 and December 31, 2010, respectively. No goodwill impairment was
recorded during 2009, 2010 and 2011.
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,
the full fair value of each reporting unit is available to support the value of
goodwill allocated to the unit. As of December 31, 2011, Citigroup operated
in three core business segments, as discussed above. Goodwill impairment
testing is performed at the reporting unit level, one level below the business
segment.
The reporting unit structure in 2011 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 2011, 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,
Latin America 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 cannot exceed the amount of goodwill allocated to a
reporting unit and cannot subsequently 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.
Citigroup engaged the services of an independent valuation specialist in
2010 and 2011 to assist in Citi’s valuation for most of the 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 and 2011, 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, 2011.
The results of the July 1, 2011 test validated that the fair values exceeded
the carrying values for the reporting units that had goodwill at the testing
date. Citi is also required to test goodwill for impairment whenever events
or circumstances make it more likely than not that impairment may have
occurred, such as a significant adverse change in the business climate, a
decision to sell or dispose of all or a significant portion of a reporting unit,
or a significant decline in Citi’s stock price. No interim goodwill impairment
tests were performed during 2011.