Citibank 2012 Annual Report Download - page 218

196
Evaluating Investments for Other-Than-Temporary
Impairment
Overview
The Company conducts and documents periodic reviews of all securities
with unrealized losses to evaluate whether the impairment is other
than temporary.
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. Losses related to HTM securities are not recorded, as these
investments are carried at 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 other-than-
temporary impairment (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.
Debt
Under the guidance for debt securities, 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.
For debt securities that are not deemed to be credit impaired,
management assesses whether it intends to sell or whether it is more-likely-
than-not that it would be required to sell the investment before the expected
recovery of the amortized cost basis. In most cases, management has asserted
that it has no intent to sell and that it believes it is not likely to be required to
sell the investment before recovery of its amortized cost basis. Where such an
assertion cannot be made, the security’s decline in fair value is deemed to be
other than temporary and is recorded in earnings.
For debt securities, a critical component of the evaluation for OTTI is
the identification of credit impaired securities, where management does not
expect to receive cash flows sufficient to recover the entire amortized cost
basis of the security. For securities purchased and classified as AFS with the
expectation of receiving full principal and interest cash flows as of the date of
purchase, this analysis considers the likelihood of receiving all contractual
principal and interest. For securities reclassified out of the trading category in
the fourth quarter of 2008, the analysis considers the likelihood of receiving
the expected principal and interest cash flows anticipated as of the date of
reclassification in the fourth quarter of 2008. The extent of the Company’s
analysis regarding credit quality and the stress on assumptions used in the
analysis have been refined for securities where the current fair value or other
characteristics of the security warrant.
Equity
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, with no expectation that
the fair value will recover prior to the expected sale date, the full impairment
is recognized in earnings as OTTI regardless of severity and duration. The
measurement of the OTTI does not include partial projected recoveries
subsequent to the balance sheet date.