JP Morgan Chase 2010 Annual Report Download - page 260

Notes to consolidated financial statements
JPMorgan Chase & Co./2010 Annual Report
260
Note 17 – Goodwill and other intangible assets
Goodwill and other intangible assets consist of the following.
December 31, (in millions)
20
10
2009 2008
Goodwill
$
48,854
$ 48,357 $ 48,027
Mortgage servicing rights
13,649
15,531 9,403
Othe
r intang
i
ble assets
Purchased credit card relationships
$
897
$ 1,246 $ 1,649
Other credit card–related intangibles
593
691 743
Core deposit intangibles
879
1,207 1,597
Other intangibles 1,670 1,477 1,592
Total other intangible
assets
$
4,039
$ 4,621 $ 5,581
Goodwill
Goodwill is recorded upon completion of a business combination as the
difference between the purchase price and the fair value of the net
assets acquired. Subsequent to initial recognition, goodwill is not
amortized but is tested for impairment during the fourth quarter of each
fiscal year, or more often if events or circumstances, such as adverse
changes in the business climate, indicate there may be impairment.
The goodwill associated with each business combination is allo-
cated to the related reporting units, which are determined based on
how the Firm’s businesses are managed and how they are reviewed
by the Firm’s Operating Committee. The following table presents
goodwill attributed to the business segments.
December 31, (in millions)
2010
2009 2008
Investment Bank
$
5,278
$ 4,959 $ 4,765
Retail Financial Services
16,813
16,831 16,840
Card Services
14,205
14,134 13,977
Commercial Banking
2,866
2,868 2,870
Treasury & Securities Services
1,680
1,667 1,633
Asset Management
7,635
7,521 7,565
Corporate/Private Equity
377
377 377
Total goodwill
$
48,854
$ 48,357 $ 48,027
The following table presents changes in the carrying amount of goodwill.
Year ended December 31, (in millions)
2010
2009 2008
Beginning balance at January 1,(a): $ 48,357 $ 48,027 $ 45,270
Changes from:
Business combinations
556
271 2,481
Dispositions
(19)
— (38 )
Other(b)
(40)
59 314
Balance at December 31,
(a)
$ 48,854 $ 48,357 $ 48,027
(a) Reflects gross goodwill balances as the Firm has not recognized any impairment
losses to date.
(b) Includes foreign currency translation adjustments and other tax-related adjustments.
The increase in goodwill during 2010 was largely due to the acquisi-
tion of the RBS Sempra Commodities business in IB, and the pur-
chase of a majority interest in Gávea Investimentos, a leading
alternative asset management company in Brazil, by AM. The
increase in goodwill during 2009 was primarily due to final purchase
accounting adjustments related to the Bear Stearns merger and the
acquisition of a commodities business (each primarily allocated to IB),
and foreign currency translation adjustments related to the Firm’s
credit card business, partially offset by accounting adjustments asso-
ciated with the Bear Stearns and Bank One mergers. The increase in
goodwill during 2008 was primarily due to the dissolution of the
Chase Paymentech Solutions joint venture (allocated to Card Ser-
vices), the merger with Bear Stearns, the purchase of an additional
equity interest in Highbridge and tax-related purchase accounting
adjustments associated with the Bank One merger (which were
primarily attributed to IB).
Impairment Testing
Goodwill was not impaired at December 31, 2010 or 2009, nor
was any goodwill written off due to impairment during 2010, 2009
or 2008.
The goodwill impairment test is performed in two steps. In the first
step, the current fair value of each reporting unit is compared with its
carrying value, including goodwill. If the fair value is in excess of the
carrying value (including goodwill), then the reporting unit’s goodwill
is considered not to be impaired. If the fair value is less than the
carrying value (including goodwill), then a second step is performed.
In the second step, the implied current fair value of the reporting
unit’s goodwill is determined by comparing the fair value of the
reporting unit (as determined in step one) to the fair value of the net
assets of the reporting unit, as if the reporting unit were being ac-
quired in a business combination. The resulting implied current fair
value of goodwill is then compared with the carrying value of the
reporting unit’s goodwill. If the carrying value of the goodwill exceeds
its implied current fair value, then an impairment charge is recognized
for the excess. If the carrying value of goodwill is less than its implied
current fair value, then no goodwill impairment is recognized.
The primary method the Firm uses to estimate the fair value of its
reporting units is the income approach. The models project cash flows
for the forecast period and use the perpetuity growth method to
calculate terminal values. These cash flows and terminal values are
then discounted using an appropriate discount rate. Projections of
cash flows are based on the reporting units’ earnings forecasts, which
include the estimated effects of regulatory and legislative changes
(including, but not limited to the Dodd-Frank Act, the CARD Act, and
limitations on non-sufficient funds and overdraft fees). These fore-
casts are also reviewed with the Operating Committee of the Firm.
The Firm’s cost of equity is determined using the Capital Asset Pricing
Model, which is consistent with methodologies and assumptions the
Firm uses when advising clients in third party transactions. The dis-
count rate used for each reporting unit represents an estimate of the
cost of equity capital for that reporting unit and is determined based
on the Firm’s overall cost of equity, as adjusted for the risk character-
istics specific to each reporting unit, (for example, for higher levels of
risk or uncertainty associated with the business or management’s
forecasts and assumptions). To assess the reasonableness of the
discount rates used for each reporting unit management compares
the discount rate to the estimated cost of equity for publicly traded
institutions with similar businesses and risk characteristics. In addi-
tion, the weighted average cost of equity (aggregating the various
reporting units) is compared with the Firms’ overall cost of equity to
ensure reasonableness.
The valuations derived from the discounted cash flow models are
then compared with market-based trading and transaction multi-
ples for relevant competitors. Precise conclusions generally can not
be drawn from these comparisons due to the differences that
naturally exist between the Firm's businesses and competitor insti-