Citibank 2012 Annual Report Download - page 169

147
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 Accumulated other comprehensive income (loss),
a component of Stockholders’ equity, net of applicable income taxes
and hedges. As described in more detail in Note 15 to the Consolidated
Financial Statements, 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 described
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 earnings.
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. Investments in unallocated precious metals accounts (gold,
silver, platinum and palladium) are accounted for as hybrid instruments
containing a debt host contract and an embedded non-financial derivative
instrument indexed to the price of the relevant precious metal. The embedded
derivative instrument is separated from the debt host contract and accounted
for at fair value. The debt host contract is accounted for at fair value
under the fair value option, as described in Note 26 to the Consolidated
Financial Statements.
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.