Sallie Mae 2012 Annual Report Download - page 89

Transfers of Financial Assets and the Variable Interest Entity (“VIE”) Consolidation Model
If we have a variable interest in a Variable Interest Entity (“VIE”) and we have determined that we are the
primary beneficiary of the VIE then we will consolidate the VIE. We are considered the primary beneficiary if
we have both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be
significant to the VIE. There can be considerable judgment that has to be used as it relates to determining the
primary beneficiary of the VIEs with which we are associated. There are no “bright line” tests. Rather, the
assessment of who has the power to direct the activities of the VIE that most significantly affect the VIE’s
economic performance and who has the obligation to absorb losses or receive benefits of the entity that could
potentially be significant to the VIE can be very qualitative and judgmental in nature. However, based on our
current relationship with our securitization trusts and other financing vehicles which are considered VIEs, we
believe the assessment is more straightforward. As it relates to our securitized assets, we are the servicer of those
securitized assets (which means we “have the power” to direct the activities of the trust) and we own the Residual
Interest (which means we “have the loss and gain obligation that could potentially be significant to the VIE”) of
the securitization trusts. As a result, we are the primary beneficiary of our securitization trusts and other
financing vehicles. See “Note 2 — Significant Accounting Policies” for further details.
Derivative Accounting
The most significant judgments related to derivative accounting are: (1) concluding the derivative is an
effective hedge and qualifies for hedge accounting and (2) determining the fair value of certain derivatives and
hedged items. To qualify for hedge accounting a derivative must be concluded to be a highly effective hedge
upon designation and on an ongoing basis. There are no “bright line” tests on what is considered a highly
effective hedge. We use a historical regression analysis to prove ongoing and prospective hedge effectiveness.
See previous discussion under “Critical Accounting Policies and Estimates — Fair Value Measurement” of this
Item 7 for significant judgments related to the valuation of derivatives. Although some of our valuations are more
judgmental than others, we compare the fair values of our derivatives that we calculate to those provided by our
counterparties on a monthly basis. We view this as a critical control which helps validate these judgments. Any
significant differences with our counterparties are identified and resolved appropriately.
Goodwill and Intangible Assets
In determining annually (or more frequently if required) whether goodwill is impaired, we first assess
qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit, which
is the same as or one level below a business segment, is less than its carrying amount as a basis for determining
whether it is necessary to perform additional goodwill impairment testing. The “more-likely-than-not” threshold
is defined as having a likelihood of more than 50 percent. If this “more-likely-than-not” threshold is met, then we
will complete a quantitative goodwill impairment analysis which consists of a comparison of the fair value of the
reporting unit to our carrying value, including goodwill. If the carrying value of the reporting unit exceeds the
fair value, a goodwill impairment analysis will be performed to measure the amount of impairment loss, if any. If
we determine that this event has occurred, we perform an analysis to determine the fair value of the business unit.
There are significant judgments involved in determining the fair value of a business unit, including assumptions
regarding estimates of future cash flows from existing and new business activities, customer relationships, the
value of existing customer contracts, the value of other tangible and intangible assets, as well as assumptions
regarding what we believe a third party would be willing to pay for all of the assets and liabilities of the business
unit. This calculation requires us to estimate the appropriate discount and growth rates to apply to those projected
cash flows and the appropriate control premium to apply to arrive at the final fair value. The business units for
which we must estimate the fair value are not publicly traded and often there is not comparable market data
available for that individual business to aid in its valuation. We use a third party appraisal firm to provide an
opinion on the fair values we conclude upon.
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