Bank of America 2008 Annual Report Download - page 131

years. The Corporation typically pays royalties in exchange for their
endorsement. Compensation costs related to the credit card agreements
are recorded as contra-revenue against card income.
Cardholder Reward Agreements
The Corporation offers reward programs that allow its cardholders to earn
points that can be redeemed for a broad range of rewards including cash,
travel and discounted products. The Corporation establishes a rewards
liability based upon the points earned which are expected to be redeemed
and the average cost per point redemption. The points to be redeemed
are estimated based on past redemption behavior, card product type,
account transaction activity and other historical card performance. The
liability is reduced as the points are redeemed. The estimated cost of the
rewards programs is recorded as contra-revenue against card income.
Insurance Premiums & Insurance Expense
Property and casualty and credit life and disability premiums are recog-
nized over the term of the policies on a pro-rata basis for all policies
except for certain of the lender-placed auto insurance and the guaranteed
auto protection (GAP) policies. For GAP insurance, revenue recognition is
correlated to the exposure and accelerated over the life of the contract.
For lender-placed auto insurance, premiums are recognized when collec-
tions become probable due to high cancellation rates experienced early in
the life of the policy. Mortgage reinsurance premiums are recognized as
earned. Insurance expense consists of insurance claims and commis-
sions, both of which are recorded in other general operating expense in
the Consolidated Statement of Income.
Note 2 – Merger and Restructuring Activity
Merrill Lynch
On January 1, 2009, the Corporation acquired Merrill Lynch through its
merger with a subsidiary of the Corporation in exchange for common and
preferred stock with a value of $29.1 billion, creating a premier financial
services franchise with significantly enhanced wealth management,
investment banking and international capabilities. Under the terms of the
merger agreement, Merrill Lynch common shareholders received 0.8595
of a share of Bank of America Corporation common stock in exchange for
each share of Merrill Lynch common stock. In addition, Merrill Lynch
non-convertible preferred shareholders received Bank of America Corpo-
ration preferred stock having substantially identical terms. Merrill Lynch
convertible preferred stock remains outstanding and is convertible into
Bank of America common stock at an equivalent exchange ratio. With the
acquisition, the Corporation has one of the largest wealth management
businesses in the world with more than 18,000 financial advisors and
more than $1.8 trillion in client assets. Global investment management
capabilities will include an economic ownership of approximately 50 per-
cent (primarily preferred stock) in BlackRock, Inc., a publicly traded
investment management company. In addition, the acquisition adds
strengths in debt and equity underwriting, sales and trading, and merger
and acquisition advice, creating significant opportunities to deepen rela-
tionships with corporate and institutional clients around the globe. Merrill
Lynch’s results of operations will be included in the Corporation’s results
beginning January 1, 2009.
The Merrill Lynch merger is being accounted for under the acquisition
method of accounting in accordance with SFAS 141R. Accordingly, the
purchase price was preliminarily allocated to the acquired assets and
liabilities based on their estimated fair values at the Merrill Lynch acquis-
ition date as summarized in the following table. Preliminary goodwill of
$5.4 billion is calculated as the purchase premium after adjusting for the
fair value of net assets acquired and represents the value expected from
the synergies created from combining the Merrill Lynch wealth manage-
ment and corporate and investment banking businesses with the Corpo-
ration’s capabilities in consumer and commercial banking as well as the
economies of scale expected from combining the operations of the two
companies. The allocation of the purchase price will be finalized upon
completion of the analysis of the fair values of Merrill Lynch’s assets and
liabilities.
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