Citibank 2011 Annual Report Download - page 160

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Investment Securities
Investments include fixed income and equity securities. Fixed income
instruments include bonds, notes and redeemable preferred stocks, as well as
certain loan-backed and structured securities that are subject to prepayment
risk. Equity securities include common and nonredeemable preferred stock.
Investment securities are classified and accounted for as follows:
฀ Fixed income securities classified as “held-to-maturity” represent
securities that the Company has both the ability and the intent to hold
until maturity, and are carried at amortized cost. Interest income on such
securities is included in Interest revenue.
฀ Fixed income securities and marketable equity securities classified
as “available-for-sale” are carried at fair value with changes in fair
value reported in a separate component of Stockholders’ equity, net of
applicable income taxes. As described in more detail in Note 15 to the
Consolidated Financial Statements, credit-related declines in fair value
that are determined to be other–than-temporary are recorded in earnings
immediately. Realized gains and losses on sales are included in income
primarily on a specific identification cost basis. Interest and dividend
income on such securities is included in Interest revenue.
฀ Venture capital investments held by Citigroup’s private equity subsidiaries
that are considered investment companies are carried at fair value with
changes in fair value reported in Other revenue. These subsidiaries
include entities registered as Small Business Investment Companies and
engage exclusively in venture capital activities.
฀ Certain investments in non-marketable equity securities and certain
investments that would otherwise have been accounted for using the
equity method are carried at fair value, since the Company has elected to
apply fair value accounting. Changes in fair value of such investments are
recorded in earnings.
฀ Certain non-marketable equity securities are carried at cost and
periodically assessed for other-than-temporary impairment, as set out in
Note 15 to the Consolidated Financial Statements.
For investments in fixed income securities classified as held-to-maturity
or available-for-sale, accrual of interest income is suspended for investments
that are in default or on which it is likely that future interest payments will
not be made as scheduled.
The Company uses a number of valuation techniques for investments
carried at fair value, which are described in Note 25 to the Consolidated
Financial Statements. Realized gains and losses on sales of investments are
included in income.
Trading Account Assets and Liabilities
Trading account assets include debt and marketable equity securities,
derivatives in a receivable position, residual interests in securitizations and
physical commodities inventory. In addition (as described in Note 26 to
the Consolidated Financial Statements), certain assets that Citigroup has
elected to carry at fair value under the fair value option, such as loans and
purchased guarantees, are also included in Trading account assets.
Trading account liabilities include securities sold, not yet purchased
(short positions), and derivatives in a net payable position, as well as certain
liabilities that Citigroup has elected to carry at fair value (as described in
Note 26 to the Consolidated Financial Statements).
Other than physical commodities inventory, all trading account assets
and liabilities are carried at fair value. Revenues generated from trading
assets and trading liabilities are generally reported in Principal transactions
and include realized gains and losses as well as unrealized gains and losses
resulting from changes in the fair value of such instruments. Interest income
on trading assets is recorded in Interest revenue reduced by interest expense
on trading liabilities.
Physical commodities inventory is carried at the lower of cost or market
with related losses reported in Principal transactions. Realized gains
and losses on sales of commodities inventory are included in Principal
transactions.
Derivatives used for trading purposes include interest rate, currency,
equity, credit, and commodity swap agreements, options, caps and floors,
warrants, and financial and commodity futures and forward contracts.
Derivative asset and liability positions are presented net by counterparty on
the Consolidated Balance Sheet when a valid master netting agreement exists
and the other conditions set out in ASC 210-20, Balance Sheet—Offsetting
are met.
The Company uses a number of techniques to determine the fair value
of trading assets and liabilities, which are described in Note 25 to the
Consolidated Financial Statements.
Securities Borrowed and Securities Loaned
Securities borrowing and lending transactions generally do not constitute a
sale of the underlying securities for accounting purposes, and so are treated
as collateralized financing transactions when the transaction involves the
exchange of cash. Such transactions are recorded at the amount of cash
advanced or received plus accrued interest. As described in Note 26 to the
Consolidated Financial Statements, the Company has elected to apply
fair value accounting to a number of securities borrowing and lending
transactions. Irrespective of whether the Company has elected fair value
accounting, fees paid or received for all securities lending and borrowing
transactions are recorded in Interest expense or Interest revenue at the
contractually specified rate.
With respect to securities borrowed or loaned, the Company monitors the
market value of securities borrowed or loaned on a daily basis and obtains
or posts additional collateral in order to maintain contractual margin
protection.
As described in Note 25 to the Consolidated Financial Statements, the
Company uses a discounted cash flow technique to determine the fair value
of securities lending and borrowing transactions.
Repurchase and Resale Agreements
Securities sold under agreements to repurchase (repos) and securities
purchased under agreements to resell (reverse repos) generally do not
constitute a sale for accounting purposes of the underlying securities and so