Wells Fargo 2005 Annual Report Download - page 66

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64
Notes to Financial Statements
Wells Fargo & Company is a diversified financial services
company. We provide banking, insurance, investments,
mortgage banking and consumer finance through banking
stores, the internet and other distribution channels to
consumers, businesses and institutions in all 50 states of
the U.S. and in other countries. In this Annual Report,
Wells Fargo & Company and Subsidiaries (consolidated)
are called the Company. Wells Fargo & Company (the Parent)
is a financial holding company and a bank holding company.
Our accounting and reporting policies conform with
U.S. generally accepted accounting principles (GAAP) and
practices in the financial services industry. To prepare the
financial statements in conformity with GAAP, management
must make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and income and expenses during the reporting
period. Management has made significant estimates in several
areas, including the allowance for credit losses (Note 6),
valuing mortgage servicing rights (Notes 20 and 21) and
pension accounting (Note 15). Actual results could differ
from those estimates.
The following is a description of our significant
accounting policies.
Consolidation
Our consolidated financial statements include the accounts
of the Parent and our majority-owned subsidiaries and vari-
able interest entities (VIEs) (defined below) in which we are
the primary beneficiary. Significant intercompany accounts
and transactions are eliminated in consolidation. If we own
at least 20% of an entity, we generally account for the
investment using the equity method. If we own less than
20% of an entity, we generally carry the investment at cost,
except marketable equity securities, which we carry at fair
value with changes in fair value included in other compre-
hensive income. Assets accounted for under the equity or
cost method are included in other assets.
We are a variable interest holder in certain special pur-
pose entities in which we do not have a controlling financial
interest or do not have enough equity at risk for the entity to
finance its activities without additional subordinated finan-
cial support from other parties. Our variable interest arises
from contractual, ownership or other monetary interests in
the entity, which change with fluctuations in the entity’s net
asset value. We consolidate a VIE if we are the primary ben-
eficiary because we will absorb a majority of the entity’s
expected losses, receive a majority of the entity’s expected
residual returns, or both.
Trading Assets
Trading assets are primarily securities, including corporate
debt, U.S. government agency obligations and other securities
that we acquire for short-term appreciation or other trading
purposes, and the fair value of derivatives held for customer
accommodation purposes or proprietary trading. Trading
assets are carried at fair value, with realized and unrealized
gains and losses recorded in noninterest income.
Securities
SECURITIES AVAILABLE FOR SALE Debt securities that we might
not hold until maturity and marketable equity securities are
classified as securities available for sale and reported at esti-
mated fair value. Unrealized gains and losses, after applicable
taxes, are reported in cumulative other comprehensive income.
We use current quotations, where available, to estimate the
fair value of these securities. Where current quotations are
not available, we estimate fair value based on the present
value of future cash flows, adjusted for the credit rating of
the securities, prepayment assumptions and other factors.
We reduce the asset value when we consider the declines
in the value of debt securities and marketable equity securi-
ties to be other-than-temporary and record the estimated loss
in noninterest income. The initial indicator of impairment
for both debt and marketable equity securities is a sustained
decline in market price below the amount recorded for that
investment. We consider the length of time and the extent
to which market value has been less than cost, any recent
events specific to the issuer and economic conditions of its
industry and our investment horizon in relationship to an
anticipated near-term recovery in the stock or bond price,
if any.
For marketable equity securities, we also consider the
issuer’s financial condition, capital strength, and near-term
prospects.
For debt securities we also consider:
• the cause of the price decline – general level of interest
rates and industry and issuer-specific factors;
• the issuer’s financial condition, near term prospects
and current ability to make future payments in a
timely manner;
• the issuer’s ability to service debt; and
• any change in agencies’ ratings at evaluation date from
acquisition date and any likely imminent action.
Note 1: Summary of Significant Accounting Policies