Bank of America 2011 Annual Report Download - page 120

118 Bank of America 2011
Net deferred tax assets, reported as a component of other
assets on our Consolidated Balance Sheet, represent the net
decrease in taxes expected to be paid in the future because of
net operating loss (NOL) and tax credit carryforwards and because
of future reversals of temporary differences in the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. NOL and tax credit carryforwards result
in reductions to future tax liabilities, and many of these attributes
can expire if not utilized within certain periods. We consider the
need for valuation allowances to reduce net deferred tax assets
to the amounts we estimate are more-likely-than-not to be realized.
While we have established some valuation allowances for
certain state and non-U.S. deferred tax assets, we have concluded
that our estimates of future taxable income by jurisdiction will be
sufficient to realize all U.S. federal and U.K. deferred tax assets,
including NOL and tax credit carryforwards, that are not subject to
any special limitations (such as change-in-control limitations) prior
to any expiration. Significant decreases to our estimate of future
taxable income by jurisdiction could materially change our
conclusions about how much of our tax attributes and other
deferred tax assets are more-likely-than-not to be realized prior to
their expiration. See Note 21 – Income Taxes to the Consolidated
Financial Statements for a table of significant tax attributes and
additional information.
Goodwill and Intangible Assets
Background
The nature of and accounting for goodwill and intangible assets
are discussed in Note 1 – Summary of Significant Accounting
Principles and Note 10 – Goodwill and Intangible Assets to the
Consolidated Financial Statements. Goodwill is reviewed for
potential impairment at the reporting unit level on an annual basis,
which for the Corporation is performed as of June 30, and in interim
periods if events or circumstances indicate a potential impairment.
A reporting unit is an operating segment or one level below. As
reporting units are determined after an acquisition or evolve with
changes in business strategy, goodwill is assigned to reporting
units and it no longer retains its association with a particular
acquisition. All of the revenue streams and related activities of a
reporting unit, whether acquired or organic, are available to support
the value of the goodwill.
We use the reporting units’ allocated equity as a proxy for the
carrying amount of equity for each reporting unit in our goodwill
impairment tests as we do not maintain a record of equity as
defined under GAAP at the reporting unit level. Allocated equity
includes economic capital, goodwill and a percentage of intangible
assets allocated to the reporting units. The allocation of economic
capital to the reporting units utilized for goodwill impairment
testing has the same basis as the allocation of economic capital
to our operating segments. Economic capital allocation plans are
incorporated into the Corporation’s financial plan which is
approved by the Board on an annual basis. Allocated equity is
updated on a quarterly basis.
The Corporation’s common stock price remained volatile during
2011 and 2010 primarily due to the continued uncertainty in the
economy and in the financial services industry, as well as adverse
developments related to our mortgage business and increased
regulation. During these periods, our market capitalization
remained below our recorded book value. We estimate that the
fair value of all reporting units in aggregate as of the June 30,
2011 annual goodwill impairment test was $210.2 billion and the
common stock market capitalization of the Corporation as of that
date was $111.1 billion ($58.6 billion at December 31, 2011).
As none of our reporting units are publicly-traded, individual
reporting unit fair value determinations do not directly correlate
to the Corporation’s stock price. Although we believe it is
reasonable to conclude that market capitalization could be an
indicator of fair value over time, we do not believe that recent
fluctuations in our market capitalization reflect the fair value of
our individual reporting units.
Estimating the fair value of reporting units is a subjective
process that involves the use of estimates and judgments,
particularly related to cash flows, the appropriate discount rates
and an applicable control premium. We determined the fair values
of the reporting units using a combination of valuation techniques
consistent with the market approach and the income approach,
and included the use of independent valuation specialists.
The market approach we used estimates the fair value of the
individual reporting units by incorporating any combination of the
tangible capital, book capital and earnings multiples from
comparable publicly-traded companies in industries similar to that
of the reporting unit. The relative weight assigned to these
multiples varies among the reporting units based on qualitative
and quantitative characteristics, primarily the size and relative
profitability of the reporting unit as compared to the comparable
publicly-traded companies. Since the fair values determined under
the market approach are representative of a noncontrolling
interest, a control premium was added to arrive at the reporting
units’ estimated fair values on a controlling basis.
For purposes of the income approach, we calculated
discounted cash flows by taking the net present value of estimated
future cash flows and an appropriate terminal value. Our
discounted cash flow analysis employs a capital asset pricing
model in estimating the discount rate (i.e., cost of equity financing)
for each reporting unit. The inputs to this model include the risk-
free rate of return, beta, which is a measure of the level of non-
diversifiable risk associated with comparable companies for each
specific reporting unit, market equity risk premium and in certain
cases an unsystematic (company-specific) risk factor. The
unsystematic risk factor is the input that specifically addresses
uncertainty related to our projections of earnings and growth,
including the uncertainty related to loss expectations. We utilized
discount rates that we believe adequately reflect the risk and
uncertainty in the financial markets generally and specifically in
our internally developed forecasts. We estimated expected rates
of equity returns based on historical market returns and risk/return
rates for similar industries of the reporting unit. We use our internal
forecasts to estimate future cash flows and actual results may
differ from forecasted results.
International Consumer Card Businesses
Of the $1.9 billion of goodwill associated with the international
consumer card businesses, $526 million of goodwill was allocated,
on a relative fair value basis, to the Canadian consumer card
business which was sold on December 1, 2011.
During the three months ended December 31, 2011, a goodwill
impairment test was performed for the European consumer card
businesses reporting unit as it was likely that the carrying amount
of the business exceeded the fair value due to a decrease in future
growth projections. We concluded that goodwill was impaired, and
accordingly, recorded a non-cash, non-tax deductible goodwill
impairment charge of $581 million for the European consumer
card businesses.