Bank of America 2011 Annual Report Download - page 155

Bank of America 2011 153
In December 2011, the FASB issued new accounting guidance
that requires additional disclosures on financial instruments and
derivative instruments that are either offset in accordance with
existing accounting guidance or are subject to an enforceable
master netting arrangement or similar agreement. The new
requirements do not change the accounting guidance on netting,
but rather enhance the disclosures to more clearly show the impact
of netting arrangements on a company’s financial position. This
new accounting guidance will be effective, on a retrospective basis
for all comparative periods presented, beginning on January 1,
2013.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in
the process of collection, and amounts due from correspondent
banks and the Federal Reserve Bank.
Securities Financing Agreements
Securities borrowed or purchased under agreements to resell and
securities loaned or sold under agreements to repurchase
(securities financing agreements) are treated as collateralized
financing transactions. These agreements are recorded at the
amounts at which the securities were acquired or sold plus accrued
interest, except for certain securities financing agreements that
the Corporation accounts for under the fair value option. Changes
in the fair value of securities financing agreements that are
accounted for under the fair value option are recorded in other
income. For more information on securities financing agreements
that the Corporation accounts for under the fair value option, see
Note 23 – Fair Value Option.
The Corporation’s policy is to obtain possession of collateral
with a market value equal to or in excess of the principal amount
loaned under resale agreements. To ensure that the market value
of the underlying collateral remains sufficient, collateral is
generally valued daily and the Corporation may require
counterparties to deposit additional collateral or may return
collateral pledged when appropriate. Securities financing
agreements give rise to negligible credit risk as a result of these
collateral provisions, and accordingly, no allowance for loan losses
is considered necessary.
Substantially all repurchase and resale activities are
transacted under legally enforceable master repurchase
agreements that give the Corporation, in the event of default by
the counterparty, the right to liquidate securities held and to offset
receivables and payables with the same counterparty. The
Corporation offsets repurchase and resale transactions with the
same counterparty on the Consolidated Balance Sheet where it
has such a legally enforceable master agreement and the
transactions have the same maturity date.
In transactions where the Corporation acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Consolidated Balance Sheet at fair value, representing the
securities received, and a liability for the same amount,
representing the obligation to return those securities.
In repurchase transactions, typically, the termination date for
a repurchase agreement is before the maturity date of the
underlying security. However, in certain situations, the Corporation
may enter into repurchase agreements where the termination date
of the repurchase transaction is the same as the maturity date of
the underlying security and these transactions are referred to as
“repo-to-maturity” (RTM) transactions. In accordance with
applicable accounting guidance, the Corporation accounts for RTM
transactions as sales and purchases when the transferred
securities are highly liquid. In instances where securities are
considered sold or purchased, the Corporation removes or
recognizes the securities from the Consolidated Balance Sheet
and, in the case of sales recognizes a gain or loss in the
Consolidated Statement of Income. At December 31, 2011 and
2010, the Corporation had no outstanding RTM transactions that
had been accounted for as sales and an immaterial amount of
transactions that had been accounted for as purchases.
Collateral
The Corporation accepts securities as collateral that it is permitted
by contract or custom to sell or repledge. At December 31, 2011
and 2010, the fair value of this collateral was $393.9 billion and
$401.7 billion of which $287.7 billion and $257.6 billion was sold
or repledged. The primary sources of this collateral are repurchase
agreements and securities borrowed. The Corporation also
pledges firm-owned securities and loans as collateral in
transactions that include repurchase agreements, securities
loaned, public and trust deposits, U.S. Treasury tax and loan notes,
and other short-term borrowings. This collateral, which in some
cases can be sold or repledged by the counterparties to the
transactions, is parenthetically disclosed on the Consolidated
Balance Sheet.
In certain cases, the Corporation has transferred assets to
consolidated VIEs where those restricted assets serve as
collateral for the interests issued by the VIEs. These assets are
disclosed on the Consolidated Balance Sheet as Assets of
Consolidated VIEs.
In addition, the Corporation obtains collateral in connection
with its derivative contracts. Required collateral levels vary
depending on the credit risk rating and the type of counterparty.
Generally, the Corporation accepts collateral in the form of cash,
U.S. Treasury securities and other marketable securities. Based
on provisions contained in legal netting agreements, the
Corporation nets cash collateral against the applicable derivative
fair value. The Corporation also pledges collateral on its own
derivative positions which can be applied against derivative
liabilities.
Trading Instruments
Financial instruments utilized in trading activities are carried at
fair value. Fair value is generally based on quoted market prices
or quoted market prices for similar assets and liabilities. If these
market prices are not available, fair values are estimated based
on dealer quotes, pricing models, discounted cash flow
methodologies, or similar techniques where the determination of
fair value may require significant management judgment or
estimation. Realized and unrealized gains and losses are
recognized in trading account profits (losses).
Derivatives and Hedging Activities
Derivatives are entered into on behalf of customers, for trading,
as economic hedges or as qualifying accounting hedges.
Derivatives utilized by the Corporation include swaps, financial
futures and forward settlement contracts, and option contracts. A
swap agreement is a contract between two parties to exchange
cash flows based on specified underlying notional amounts,
assets and/or indices. Financial futures and forward settlement