Wells Fargo 2015 Annual Report Download - page 144

Note 1: Summary of Significant Accounting Policies (continued)
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.
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 are 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
the amount related to all other factors, which is recognized in
OCI. The measurement of the credit loss component is equal to
the difference between the debt security's amortized cost basis
and the present value of its expected future cash flows
discounted at the security's effective yield. The remaining
difference between the security’s fair value and the present value
of expected future cash flows is due to factors that are not credit-
related and, therefore, is recognized in OCI. We believe that we
will fully collect the carrying value of securities on which we have
recorded a non-credit-related impairment in OCI.
We hold investments in perpetual preferred securities (PPS)
that are structured in equity form but have many of the
characteristics of debt instruments, including periodic cash flows
in the form of dividends, call features, ratings that are similar to
debt securities and pricing like long-term callable bonds.
Because of the hybrid nature of these securities, we evaluate
PPS for OTTI using a model similar to the model we use for debt
securities as described above. Among the factors we consider in
our evaluation of PPS are whether there is any evidence of
deterioration in the credit of the issuer as indicated by a decline
in cash flows or a rating agency downgrade to below investment
grade and the estimated recovery period. OTTI write-downs of
PPS are recognized in earnings equal to the difference between
the cost basis and fair value of the security. Based upon the
factors considered in our OTTI evaluation, we believe our
investments in PPS currently rated investment grade will be fully
realized and, accordingly, have not recognized OTTI on such
securities.
For marketable equity securities other than PPS, OTTI
evaluations focus on whether evidence exists that supports
recovery of the unrealized loss within a timeframe consistent
with temporary impairment. This evaluation considers the
severity of and length of time fair value is below cost, our intent
and ability to hold the security until forecasted recovery of the
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