Wells Fargo 2010 Annual Report Download - page 120

Note 1: Summary of Significant Accounting Policies (continued)
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life or lease term for leasehold
improvements. We amortize capitalized leased assets on a
straight-line basis over the lives of the respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment annually, and more
frequently in certain circumstances. We have determined that
our reporting units are one level below the operating segments.
We assess goodwill for impairment on a reporting unit level and
apply various valuation methodologies as appropriate to
compare the estimated fair value to the carrying value of each
reporting unit. Valuation methodologies include discounted cash
flow and earnings multiple approaches. If the fair value is less
than the carrying amount, a second test is required to measure
the amount of impairment. We recognize impairment losses as a
charge to noninterest expense (unless related to discontinued
operations) and an adjustment to the carrying value of the
goodwill asset. Subsequent reversals of goodwill impairment are
prohibited.
We amortize core deposit and other customer relationship
intangibles on an accelerated basis over useful lives not
exceeding 10 years. We review such intangibles for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Impairment is
indicated if the sum of undiscounted estimated future net cash
flows is less than the carrying value of the asset. Impairment is
permanently recognized by writing down the asset to the extent
that the carrying value exceeds the estimated fair value.
Operating Lease Assets
Operating lease rental income for leased assets is recognized in
other income on a straight-line basis over the lease term. Related
depreciation expense is recorded on a straight-line basis over the
life of the lease, taking into account the estimated residual value
of the leased asset. On a periodic basis, leased assets are
reviewed for impairment. Impairment loss is recognized if the
carrying amount of leased assets exceeds fair value and is not
recoverable. The carrying amount of leased assets is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the lease payments and the estimated
residual value upon the eventual disposition of the equipment.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) Freddie Mac and Fannie Mae (government-sponsored
entities (GSEs)), which include the mortgage loans in GSE-
guaranteed mortgage securitizations, (2) special purpose entities
that issue private label MBS, and (3) other financial institutions
that purchase mortgage loans for investment or private label
securitization. In addition, we pool Federal Housing
Administration (FHA)-insured and Department of Veterans
Affairs (VA)-guaranteed mortgage loans, which back securities
guaranteed by the Government National Mortgage Association
(GNMA).
We may be required to repurchase mortgage loans,
indemnify the securitization trust, investor or insurer, or
reimburse the securitization trust, investor or insurer for credit
losses incurred on loans (collectively “repurchase”) in the event
of a breach of specified contractual representations or warranties
that are not remedied within a period (usually 90 days or less)
after we receive notice of the breach. Typically, we would only be
required to repurchase securitized loans if a breach is deemed to
have material and adverse effect on the value of the mortgage
loan or to the interests of the security holders in the mortgage
loan.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Such factors
incorporate estimated levels of defects based on internal quality
assurance sampling, default expectations, historical investor
repurchase demand and appeals success rates (where the
investor rescinds the demand based on a cure of the defect or
acknowledges that the loan satisfies the investor’s applicable
representations and warranties), reimbursement by
correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold
and continually update our liability estimate during their life.
Although investors may demand repurchase at any time, the
majority of repurchase demands occur in the first 24 to 36
months following origination of the mortgage loan and can vary
by investor.
The liability for mortgage loan repurchase losses is included
in other liabilities. For additional information on our repurchase
liability, see Note 9.
Pension Accounting
We account for our defined benefit pension plans using an
actuarial model as more fully discussed in Note 19. In 2008, we
changed our measurement date for our plan assets and benefit
obligations from November 30 to December 31, which did not
change the amount of net periodic benefit expense recognized in
our income statement.
Income Taxes
We file consolidated and separate company federal income tax
returns, foreign tax returns and various combined and separate
company state tax returns.
We evaluate two components of income tax expense: current
and deferred. Current income tax expense approximates taxes to
be paid or refunded for the current period and includes income
tax expense related to our uncertain tax positions. We determine
deferred income taxes using the balance sheet method. Under
this method, the net deferred tax asset or liability is based on the
tax effects of the differences between the book and tax bases of
assets and liabilities, and recognizes enacted changes in tax rates
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