Bank of America 2006 Annual Report Download - page 85

uses of such models, that resulted in a material adjustment to the Con-
solidated Statement of Income.
Trading Account Profits, which represent the net amount earned from
our trading positions, can be volatile and are largely driven by general
market conditions and customer demand. Trading Account Profits are
dependent on the volume and type of transactions, the level of risk
assumed, and the volatility of price and rate movements at any given time
within the ever-changing market environment. To evaluate risk in our trad-
ing activities, we focus on the actual and potential volatility of individual
positions as well as portfolios. At a portfolio and corporate level, we use
trading limits, stress testing and tools such as VAR modeling, which esti-
mates a potential daily loss which is not expected to be exceeded with a
specified confidence level, to measure and manage market risk. At
December 31, 2006, the amount of our VAR was $48 million based on a
99 percent confidence level. For more information on VAR, see Trading
Risk Management beginning on page 76.
The Corporation recognizes gains and losses at inception of a
derivative contract only if the fair value of the contract is evidenced by a
quoted market price in an active market, an observable price or other
market transaction, or other observable data supporting a valuation model
in accordance with Emerging Issues Task Force (EITF) Issue No. 02-3,
“Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities” (EITF 02-3). For those gains and losses not evidenced by the
above mentioned market data, the transaction price is used as the fair
value of the derivative contract. Any difference between the transaction
price and the model fair value is considered an unrecognized gain or loss
at inception of the contract. These unrecognized gains and losses are
recorded in income using the straight line method of amortization over the
contractual life of the derivative contract. Earlier recognition of the full
unrecognized gain or loss is permitted if the trade is terminated early,
subsequent market activity is observed which supports the model fair
value of the contract, or significant inputs used in the valuation model
become observable in the market. As of December 31, 2006, the balance
of the above unrecognized gains and losses was not material. SFAS
No. 157, “Fair Value Measurements” which defines fair value, establishes
a framework for measuring fair value under GAAP and enhances dis-
closures about fair value measurements, will nullify certain guidance in
EITF 02-3 when adopted and as a result, a portion of the above unrecog-
nized gains and losses will be accounted for as a cumulative-effect
adjustment to the opening balance of Retained Earnings.
AFS Securities are recorded at fair value, which is generally based on
direct market quotes from actively traded markets.
Principal Investing
Principal Investing is included within Equity Investments included in All
Other and is discussed in more detail beginning on page 55. Principal
Investing is comprised of a diversified portfolio of investments in privately-
held and publicly-traded companies at all stages of their life cycle, from
start-up to buyout. These investments are made either directly in a com-
pany or held through a fund. Some of these companies may need access
to additional cash to support their long-term business models. Market
conditions and company performance may impact whether funding is avail-
able from private investors or the capital markets.
Investments with active market quotes are carried at estimated fair
value; however, the majority of our investments do not have publicly avail-
able price quotations. At December 31, 2006, we had nonpublic invest-
ments of $5.1 billion, or approximately 95 percent of the total portfolio.
Valuation of these investments requires significant management judg-
ment. Management determines values of the underlying investments
based on multiple methodologies including in-depth semi-annual reviews of
the investee’s financial statements and financial condition, discounted
cash flows, the prospects of the investee’s industry and current overall
market conditions for similar investments. In addition, on a quarterly basis
as events occur or information comes to the attention of management that
indicates a change in the value of an investment is warranted, invest-
ments are adjusted from their original invested amount to estimated fair
values at the balance sheet date with changes being recorded in Equity
Investment Gains in the Consolidated Statement of Income. Investments
are not adjusted above the original amount invested unless there is clear
evidence of a fair value in excess of the original invested amount. As part
of the valuation process, senior management reviews the portfolio and
determines when an impairment needs to be recorded. The Principal Inves-
ting portfolio is not material to our Consolidated Balance Sheet, but the
impact of the valuation adjustments may be material to our operating
results for any particular quarter.
Accrued Income Taxes
As more fully described in Notes 1 and 18 of the Consolidated Financial
Statements, we account for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes” (SFAS 109). Accrued income
taxes, reported as a component of Accrued Expenses and Other Liabilities
on our Consolidated Balance Sheet, represents the net amount of current
income taxes we expect to pay to or receive from various taxing juris-
dictions attributable to our operations to date. We currently file income tax
returns in more than 100 jurisdictions and consider many factors – includ-
ing statutory, judicial and regulatory guidance – in estimating the appro-
priate accrued income taxes for each jurisdiction.
In applying the principles of SFAS 109, we monitor relevant tax
authorities and change our estimate of accrued income taxes due to
changes in income tax laws and their interpretation by the courts and regu-
latory authorities. These revisions of our estimate of accrued income tax-
es, which also may result from our own income tax planning and from the
resolution of income tax controversies, may be material to our operating
results for any given quarter.
Goodwill and Intangibles Assets
The nature of and accounting for Goodwill and Intangible Assets is dis-
cussed in detail in Notes 1 and 10 of the Consolidated Financial State-
ments. Goodwill is reviewed for potential impairment at the reporting unit
level on an annual basis, or in interim periods if events or circumstances
indicate a potential impairment. The reporting units utilized for this test
were those that are one level below the business segments identified on
page 43. The impairment test is performed in two steps. The first step of
the Goodwill impairment test compares the fair value of the reporting unit
with its carrying amount, including Goodwill. If the fair value of the report-
ing unit exceeds its carrying amount, Goodwill of the reporting unit is con-
sidered not impaired; however, if the carrying amount of the reporting unit
exceeds its fair value, the second step must be performed. The second
step compares the implied fair value of the reporting unit’s Goodwill, as
defined in SFAS No. 142, “Goodwill and Other Intangible Assets”, with the
carrying amount of that Goodwill. An impairment loss is recorded to the
extent that the carrying amount of Goodwill exceeds its implied fair value.
For Intangible Assets subject to amortization, impairment exists when
the carrying amount of the Intangible Asset exceeds its fair value. An
impairment loss will be recognized only if the carrying amount of the
Intangible Asset is not recoverable and exceeds its fair value. The carrying
amount of the Intangible Asset is not recoverable if it exceeds the sum of
Bank of America 2006 83