Bank of America 2012 Annual Report Download - page 124

122 Bank of America 2012
In 2012, the IWM businesses within GWIM, including $230
million of goodwill, were moved to All Other in connection with the
agreement we entered into during 2012 to sell these businesses.
Prior periods have been reclassified.
2012 Annual Impairment Test
During the three months ended September 30, 2012, we
completed our annual goodwill impairment test as of June 30,
2012 for all of our reporting units which had goodwill. Additionally,
we also evaluated the U.K. Card business within All Other as the
U.K. Card business comprises the majority of the goodwill included
in All Other. In performing the first step of the annual goodwill
impairment test, we compared the fair value of each reporting unit
to its estimated carrying value as measured by allocated equity,
including goodwill. To determine fair value, we utilized a
combination of the market approach and income approach. Under
the market approach, we compared earnings and equity multiples
of the individual reporting units to multiples of public companies
comparable to the individual reporting units. The control premium
used in the June 30, 2012 annual goodwill impairment test was
35 percent for all reporting units. Under the income approach, we
updated our assumptions to reflect the current market
environment. The discount rates used in the June 30, 2012 annual
goodwill impairment test ranged from 11 percent to 14 percent
depending on the relative risk of a reporting unit. Growth rates
developed by management for individual revenue and expense
items in each reporting unit ranged from (0.2) percent to 7.2
percent. For certain revenue and expense items that have been
significantly affected by the current economic environment,
management developed separate long-term forecasts.
Based on the results of step one of the annual goodwill
impairment test, we determined that step two was not required
for any of the reporting units as their respective fair values
exceeded their carrying values indicating there was no impairment.
2011 Impairment Tests
During the three months ended December 31, 2011, a goodwill
impairment test was performed for the European consumer card
businesses reporting unit within All Other as it was likely that the
carrying amount of the reporting unit exceeded the fair value due
to a decrease in estimated future growth projections. We
concluded that goodwill was impaired, and accordingly, recorded
a goodwill impairment charge of $581 million.
During the three months ended June 30, 2011, as a
consequence of the BNY Mellon Settlement entered into by the
Corporation on June 28, 2011, the adverse impact of the
incremental mortgage-related charges and the continued
economic slowdown in the mortgage business, we performed a
goodwill impairment test for the CRES reporting unit. We concluded
that the remaining balance of goodwill of $2.6 billion was impaired,
and accordingly, recorded a goodwill impairment charge to reduce
the carrying value of the goodwill in CRES to zero.
Representations and Warranties
The methodology used to estimate the liability for obligations under
representations and warranties related to transfers of residential
mortgage loans is a function of the representations and warranties
given and considers a variety of factors. Depending upon the
counterparty, these factors include actual defaults, estimated
future defaults, historical loss experience, estimated home prices,
other economic conditions, estimated probability that we will
receive a repurchase request, including consideration of whether
presentation thresholds will be met, number of payments made
by the borrower prior to default and estimated probability that we
will be required to repurchase a loan. It also considers other
relevant facts and circumstances, such as bulk settlements and
identity of the counterparty or type of counterparty, as appropriate.
The estimate of the liability for obligations under representations
and warranties is based upon currently available information,
significant judgment, and a number of factors, including those set
forth above, that are subject to change. Changes to any one of
these factors could significantly impact the estimate of our liability.
The representations and warranties provision may vary
significantly each period as the methodology used to estimate the
expense continues to be refined based on the level and type of
repurchase requests presented, defects identified, the latest
experience gained on repurchase requests, and other relevant
facts and circumstances. The estimate of the liability for
representations and warranties is sensitive to future defaults, loss
severity and the net repurchase rate. An assumed simultaneous
increase or decrease of 10 percent in estimated future defaults,
loss severity and the net repurchase rate would result in an
increase of approximately $850 million or decrease of
approximately $750 million in the representations and warranties
liability as of December 31, 2012, excluding amounts related to
the FNMA Settlement. These sensitivities are hypothetical and are
intended to provide an indication of the impact of a significant
change in these key assumptions on the representations and
warranties liability. In reality, changes in one assumption may result
in changes in other assumptions, which may or may not counteract
the sensitivity.
For additional information on representations and warranties
exposure and the corresponding range of possible loss, see Off-
Balance Sheet Arrangements and Contractual Obligations –
Representations and Warranties on page 50, as well as Note 8 –
Representations and Warranties Obligations and Corporate
Guarantees and Note 13 – Commitments and Contingencies to the
Consolidated Financial Statements.