Wells Fargo 2014 Annual Report Download - page 142

Note 1: Summary of Significant Accounting Policies (continued)
in first quarter 2014. This Update did not have a material effect
on our consolidated financial statements.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our majority-owned subsidiaries and variable
interest entities (VIEs) (defined below) in which we are the
primary beneficiary. Significant intercompany accounts and
transactions are eliminated in consolidation. When we have
significant influence over operating and financing decisions for a
company but do not own a majority of the voting equity
interests, we account for the investment using the equity method
of accounting, which requires us to recognize our proportionate
share of the company’s earnings. If we do not have significant
influence, we recognize the equity investment at cost except for
(1) marketable equity securities, which we recognize at fair value
with changes in fair value included in OCI, and (2)
nonmarketable equity investments for which we have elected the
fair value option. Investments accounted for under the equity or
cost method are included in Other Assets.
We are a variable interest holder in certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or where the entity does not have enough
equity at risk to finance its activities without additional
subordinated financial support from other parties (referred to as
VIEs). Our variable interest arises from contractual, ownership
or other monetary interests in the entity, which change with
fluctuations in the fair value of the entity's net assets. We
consolidate a VIE if we are the primary beneficiary, defined as
the party that has both the power to direct the activities that
most significantly impact the VIE and a variable interest that
potentially could be significant to the VIE. To determine whether
or not a variable interest we hold could potentially be significant
to the VIE, we consider both qualitative and quantitative factors
regarding the nature, size and form of our involvement with the
VIE. We assess whether or not we are the primary beneficiary of
a VIE on an ongoing basis.
Cash and Due From Banks
Cash and cash equivalents include cash on hand, cash items in
transit, and amounts due from the Federal Reserve Bank and
other depository institutions.
Trading Assets
Trading assets are predominantly securities, including corporate
debt, U.S. government agency obligations and other securities
that we acquire for short-term appreciation or other trading
purposes, certain loans held for market-making purposes to
support the buying and selling demands of our customers
and derivatives primarily held for customer accommodation
purposes or risk mitigation and hedging. Interest-only strips and
other retained interests in securitizations that can be
contractually prepaid or otherwise settled in a way that the
holder would not recover substantially all of its recorded
investment are classified as trading assets. Trading assets are
carried at fair value, with changes in fair value recorded in
earnings. For securities and loans in trading assets, interest and
dividend income are recorded in interest income, and realized
and unrealized gains and losses recorded in noninterest income.
For other trading assets, including derivatives, the entire change
in fair value is recorded in noninterest income.
Investments
Our investments include various debt and marketable equity
securities and nonmarketable equity investments. We classify
debt and marketable equity securities as available-for-sale or
held-to-maturity securities based on our intent to hold to
maturity. Our nonmarketable equity investments are reported in
Other Assets.
AVAILABLE-FOR-SALE SECURITIES Debt securities that we
might not hold until maturity and marketable equity securities
are classified as available-for-sale securities and reported at fair
value. Unrealized gains and losses, after applicable income taxes,
are reported in cumulative OCI.
We conduct other-than-temporary impairment (OTTI)
analysis on a quarterly basis or more often if a potential loss-
triggering event occurs. The initial indicator of OTTI for both
debt and equity securities is a decline in fair value below the
amount recorded for an investment and the severity and
duration of the decline.
For a debt security for which there has been a decline in the
fair value below amortized cost basis, we recognize OTTI if we
(1) have the intent to sell the security, (2) it is more likely than
not that we will be required to sell the security before recovery of
its amortized cost basis, or (3) we do not expect to recover the
entire amortized cost basis of the security.
Estimating recovery of the amortized cost basis of a debt
security is based upon an assessment of the cash flows expected
to be collected. If the present value of cash flows expected to be
collected, discounted at the security’s effective yield, is less than
amortized cost, OTTI is considered to have occurred. In
performing an assessment of the cash flows expected to be
collected, we consider all relevant information including:
• the length of time and the extent to which the fair value has
been less than the amortized cost basis;
• the historical and implied volatility of the fair value of the
security;
• the cause of the price decline, such as the general level of
interest rates or adverse conditions specifically related to
the security, an industry or a geographic area;
• the issuer's financial condition, near-term prospects and
ability to service the debt;
• the payment structure of the debt security and the
likelihood of the issuer being able to make payments that
increase in the future;
• for asset-backed securities, the credit performance of the
underlying collateral, including delinquency rates, level of
non-performing assets, cumulative losses to date, collateral
value and the remaining credit enhancement compared with
expected credit losses;
• any change in rating agencies' credit ratings at evaluation
date from acquisition date and any likely imminent action;
• independent analyst reports and forecasts, sector credit
ratings and other independent market data; and
• recoveries or additional declines in fair value subsequent to
the balance sheet date.
If we intend to sell the security, or if it is more likely than
not we will be required to sell the security before recovery, an
OTTI write-down is recognized in earnings equal to the entire
difference between the amortized cost basis and fair value of the
security. For debt securities that are considered other-than-
temporarily impaired that we do not intend to sell or it is more
likely than not that we will not be required to sell before
recovery, the OTTI write-down is separated into an amount
representing the credit loss, which is recognized in earnings, and
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