Citibank 2011 Annual Report Download - page 212

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Evaluating Investments for Other-Than-Temporary
Impairments
The Company 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 for debt securities that the Company has an
intent to sell or that the Company 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 the Company 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
AFS securities, while such losses related to HTM securities are not recorded,
as these investments are carried at their amortized cost. For securities
transferred to HTM from Trading account assets, amortized cost is defined
as the fair value of the securities at the date of transfer, plus any accretion
income and less any impairment recognized in earnings subsequent to
transfer. For securities transferred to HTM from AFS, 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.
Regardless of the classification of the securities as AFS or HTM, the
Company has assessed each position with an unrealized loss for OTTI.
Factors considered in determining whether a loss is temporary include:
฀ the length of time and the extent to which fair value has been below cost;
฀ the severity of the impairment;
฀ the cause of the impairment and the financial condition and near-term
prospects of the issuer;
฀ activity in the market of the issuer that may indicate adverse credit
conditions; and
฀ the Company’s ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery.
The Company’s review for impairment generally entails:
฀ identification and evaluation of investments that have indications of
possible impairment;
฀ analysis of individual investments that have fair values less than
amortized cost, including consideration of the length of time the
investment has been in an unrealized loss position and the expected
recovery period;
฀ discussion of evidential matter, including an evaluation of factors or
triggers that could cause individual investments to qualify as having
other-than-temporary impairment and those that would not support
other-than-temporary impairment; and
฀ documentation of the results of these analyses, as required under
business policies.
For equity securities, management considers the various factors described
above, including its intent and ability to hold the equity security for a period
of time sufficient for recovery to cost or whether it is more-likely-than-not
that the Company will be required to sell the security prior to recovery of
its cost basis. Where management lacks that intent or ability, the security’s
decline in fair value is deemed to be other-than-temporary and is recorded in
earnings. AFS equity securities deemed other-than-temporarily impaired are
written down to fair value, with the full difference between fair value and cost
recognized in earnings.
Management assesses equity method investments with fair value less
than carrying value for OTTI. Fair value is measured as price multiplied
by quantity if the investee has publicly listed securities. If the investee is
not publicly listed, other methods are used (see Note 25 to the Consolidated
Financial Statements).
For impaired equity method investments that Citi plans to sell prior
to recovery of value, or would likely be required to sell and there is no
expectation that the fair value will recover prior to the expected sale date, the
full impairment is recognized in the Consolidated Statement of Income as
OTTI regardless of severity and duration. The measurement of the OTTI does
not include partial projected recoveries subsequent to the balance sheet date.
For impaired equity method investments that management does not plan
to sell prior to recovery of value and is not likely to be required to sell, the
evaluation of whether an impairment is other than temporary is based on
(i) whether and when an equity method investment will recover in value and
(ii) whether the investor has the intent and ability to hold that investment for
a period of time sufficient to recover the value. The determination of whether
the impairment is considered other-than-temporary is based on all of the
following indicators, regardless of the time and extent of impairment:
฀ Cause of the impairment and the financial condition and near-term
prospects of the issuer, including any specific events that may influence
the operations of the issuer.
฀ Intent and ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in market value.
฀ Length of time and extent to which fair value has been less than the
carrying value.
At December 31, 2011, Citi had several equity method investments that
had temporary impairment, including its investments in Akbank and the
Morgan Stanley Smith Barney joint venture (MSSB), each as discussed
further below. As of December 31, 2011, management does not plan to sell
those investments prior to recovery of value and it is not more likely than
not that Citi will be required to sell those investments prior to recovery
in value.
Excluding the impact of foreign currency translation and related
hedges, the fair value of Citi’s equity method investment in Akbank
had exceeded its carrying value. During the fourth quarter of 2011,
however, the fair value of Citi’s equity method investment in Akbank
declined, resulting in a temporary impairment. During 2012 to date,
Akbank’s share price has recovered significantly, and as of February 23,
2012, the temporary impairment was approximately $0.2 billion. As of