JP Morgan Chase 2015 Annual Report Download - page 284

Notes to consolidated financial statements
274 JPMorgan Chase & Co./2015 Annual Report
Note 17 – Goodwill and other intangible assets
Goodwill
Goodwill is recorded upon completion of a business
combination as the difference between the purchase price
and the fair value of the net assets acquired. Subsequent to
initial recognition, goodwill is not amortized but is tested
for impairment during the fourth quarter of each fiscal
year, or more often if events or circumstances, such as
adverse changes in the business climate, indicate there may
be impairment.
The goodwill associated with each business combination is
allocated to the related reporting units, which are
determined based on how the Firm’s businesses are
managed and how they are reviewed by the Firm’s
Operating Committee. The following table presents goodwill
attributed to the business segments.
December 31, (in millions) 2015 2014 2013
Consumer & Community Banking $ 30,769 $ 30,941 $ 30,985
Corporate & Investment Bank 6,772 6,780 6,888
Commercial Banking 2,861 2,861 2,862
Asset Management 6,923 6,964 6,969
Corporate —101 377
Total goodwill $ 47,325 $ 47,647 $ 48,081
The following table presents changes in the carrying
amount of goodwill.
Year ended December 31,
(in millions) 2015 2014 2013
Balance at beginning of period $ 47,647 $ 48,081 $ 48,175
Changes during the period
from:
Business combinations 28 43 64
Dispositions (160) (b) (80) (5)
Other(a) (190) (397) (153)
Balance at December 31, $ 47,325 $ 47,647 $ 48,081
(a) Includes foreign currency translation adjustments, other tax-related
adjustments, and, during 2014, goodwill impairment associated with
the Firm’s Private Equity business of $276 million.
(b) Includes $101 million of Private Equity goodwill, which was disposed
of as part of the Private Equity sale completed in January 2015.
Impairment testing
The Firm’s goodwill was not impaired at December 31,
2015. Further, except for the goodwill related to its Private
Equity business, the Firm’s goodwill was not impaired at
December 31, 2014. $276 million of goodwill was written
off during 2014 related to the goodwill impairment
associated with the Firm’s Private Equity business. No
goodwill was written off due to impairment during 2013.
The goodwill impairment test is performed in two steps. In
the first step, the current fair value of each reporting unit is
compared with its carrying value, including goodwill. If the
fair value is in excess of the carrying value (including
goodwill), then the reporting unit’s goodwill is considered
not to be impaired. If the fair value is less than the carrying
value (including goodwill), then a second step is performed.
In the second step, the implied current fair value of the
reporting unit’s goodwill is determined by comparing the
fair value of the reporting unit (as determined in step one)
to the fair value of the net assets of the reporting unit, as if
the reporting unit were being acquired in a business
combination. The resulting implied current fair value of
goodwill is then compared with the carrying value of the
reporting unit’s goodwill. If the carrying value of the
goodwill exceeds its implied current fair value, then an
impairment charge is recognized for the excess. If the
carrying value of goodwill is less than its implied current
fair value, then no goodwill impairment is recognized.
The Firm uses the reporting units’ allocated equity plus
goodwill capital as a proxy for the carrying amounts of
equity for the reporting units in the goodwill impairment
testing. Reporting unit equity is determined on a similar
basis as the allocation of equity to the Firm’s lines of
business, which takes into consideration the capital the
business segment would require if it were operating
independently, incorporating sufficient capital to address
regulatory capital requirements (including Basel III),
economic risk measures and capital levels for similarly
rated peers. Proposed line of business equity levels are
incorporated into the Firm’s annual budget process, which
is reviewed by the Firm’s Board of Directors. Allocated
equity is further reviewed on a periodic basis and updated
as needed.
The primary method the Firm uses to estimate the fair
value of its reporting units is the income approach. The
models project cash flows for the forecast period and use
the perpetuity growth method to calculate terminal values.
These cash flows and terminal values are then discounted
using an appropriate discount rate. Projections of cash
flows are based on the reporting units’ earnings forecasts,
which include the estimated effects of regulatory and
legislative changes (including, but not limited to the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”)), and which are reviewed with the senior
management of the Firm. The discount rate used for each
reporting unit represents an estimate of the cost of equity
for that reporting unit and is determined considering the
Firm’s overall estimated cost of equity (estimated using the
Capital Asset Pricing Model), as adjusted for the risk
characteristics specific to each reporting unit (for example,
for higher levels of risk or uncertainty associated with the
business or management’s forecasts and assumptions). To
assess the reasonableness of the discount rates used for
each reporting unit management compares the discount
rate to the estimated cost of equity for publicly traded
institutions with similar businesses and risk characteristics.
In addition, the weighted average cost of equity
(aggregating the various reporting units) is compared with
the Firms’ overall estimated cost of equity to ensure
reasonableness.
The valuations derived from the discounted cash flow
models are then compared with market-based trading and
transaction multiples for relevant competitors. Trading and
transaction comparables are used as general indicators to