Fifth Third Bank 2013 Annual Report Download - page 100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 Fifth Third Bancorp
Goodwill
Business combinations entered into by the Bancorp typically include
the acquisition of goodwill. Goodwill is required to be tested for
impairment at the Bancorp’s reporting unit level on an annual basis,
which for the Bancorp is September 30, and more frequently if
events or circumstances indicate that there may be impairment. The
Bancorp has determined that its segments qualify as reporting units
under U.S. GAAP.
Impairment exists when a reporting unit’s carrying amount of
goodwill exceeds its implied fair value. In testing goodwill for
impairment, U.S. GAAP permits the Bancorp to first assess
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount
(Step 0). In this qualitative assessment, the Bancorp evaluates events
and circumstances which may include, but are not limited to, the
general economic environment, banking industry and market
conditions, the overall financial performance of the Bancorp, the
performance of the Bancorp’s stock, the key financial performance
metrics of the reporting units, and events affecting the reporting
units. If, after assessing the totality of events and circumstances, the
Bancorp determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing
the two-step impairment test would be unnecessary. However, if the
Bancorp concludes otherwise, it would then be required to perform
the first step (Step 1) of the goodwill impairment test, and continue
to the second step (Step 2), if necessary. Step 1 of the goodwill
impairment test compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of the
reporting unit exceeds its fair value, Step 2 of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any.
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction between
market participants at the measurement date. Since none of the
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. To determine the fair value of a reporting
unit, the Bancorp employs an income-based approach, utilizing the
reporting unit’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the reporting unit’s estimated cost of equity as the
discount rate. Additionally, the Bancorp determines its market
capitalization based on the average of the closing price of the
Bancorp’s stock during the month including the measurement date,
incorporating an additional control premium, and compares this
market-based fair value measurement to the aggregate fair value of
the Bancorp’s reporting units in order to corroborate the results of
the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the implied
fair value, an impairment loss equal to that excess amount is
recognized. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit subsequently
recovers.
During Step 2, the Bancorp determines the implied fair value of
goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. This assignment
process is only performed for purposes of testing goodwill for
impairment. The Bancorp does not adjust the carrying values of
recognized assets or liabilities (other than goodwill, if appropriate),
nor recognize previously unrecognized intangible assets in the
Consolidated Financial Statements as a result of this assignment
process. Refer to Note 8 for further information regarding the
Bancorp’s goodwill.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Valuation techniques the Bancorp uses to
measure fair value include the market approach, income approach
and cost approach. The market approach uses prices or relevant
information generated by market transactions involving identical or
comparable assets or liabilities. The income approach involves
discounting future amounts to a single present amount and is based
on current market expectations about those future amounts. The
cost approach is based on the amount that currently would be
required to replace the service capacity of the asset.
U.S. GAAP establishes a fair value hierarchy, which prioritizes
the inputs to valuation techniques used to measure fair value into
three broad levels. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). A
financial instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
instrument’s fair value measurement. The three levels within the fair
value hierarchy are described as follows:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Bancorp has the ability to
access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar
assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
Level 3 – Unobservable inputs for the asset or liability for which
there is little, if any, market activity at the measurement date.
Unobservable inputs reflect the Bancorp’s own assumptions
about what market participants would use to price the asset or
liability. The inputs are developed based on the best
information available in the circumstances, which might
include the Bancorp’s own financial data such as internally
developed pricing models and discounted cash flow
methodologies, as well as instruments for which the fair value
determination requires significant management judgment.
The Bancorp's fair value measurements involve various valuation
techniques and models, which involve inputs that are observable,
when available. Valuation techniques and parameters used for
measuring assets and liabilities are reviewed and validated by the
Bancorp on a quarterly basis. Additionally, the Bancorp monitors
the fair values of significant assets and liabilities using a variety of
methods including the evaluation of pricing runs and exception
reports based on certain analytical criteria, comparison to previous
trades and overall review and assessments for reasonableness. See
Note 27 for further information on fair value measurements.