Bank of America 2012 Annual Report Download - page 125

Bank of America 2012 123
Litigation Reserve
In accordance with applicable accounting guidance, the
Corporation establishes an accrued liability for litigation and
regulatory matters when those matters present loss contingencies
that are both probable and estimable. In such cases, there may
be an exposure to loss in excess of any amounts accrued. When
a loss contingency is not both probable and estimable, the
Corporation does not establish an accrued liability. As a litigation
or regulatory matter develops, the Corporation, in conjunction with
any outside counsel handling the matter, evaluates on an ongoing
basis whether such matter presents a loss contingency that is
both probable and estimable. If, at the time of evaluation, the loss
contingency related to a litigation or regulatory matter is not both
probable and estimable, the matter will continue to be monitored
for further developments that would make such loss contingency
both probable and estimable. Once the loss contingency related
to a litigation or regulatory matter is deemed to be both probable
and estimable, the Corporation will establish an accrued liability
with respect to such loss contingency and record a corresponding
amount of litigation-related expense. The Corporation will continue
to monitor the matter for further developments that could affect
the amount of the accrued liability that has been previously
established.
For a limited number of the matters disclosed in Note 13 –
Commitments and Contingencies to the Consolidated Financial
Statements for which a loss is probable or reasonably possible in
future periods, whether in excess of a related accrued liability or
where there is no accrued liability, we are able to estimate a range
of possible loss. In determining whether it is possible to provide
an estimate of loss or range of possible loss, the Corporation
reviews and evaluates its material litigation and regulatory matters
on an ongoing basis, in conjunction with any outside counsel
handling the matter, in light of potentially relevant factual and legal
developments. These may include information learned through the
discovery process, rulings on dispositive motions, settlement
discussions, and other rulings by courts, arbitrators or others. In
cases in which the Corporation possesses sufficient information
to develop an estimate of loss or range of possible loss, that
estimate is aggregated and disclosed in Note 13 – Commitments
and Contingencies to the Consolidated Financial Statements. For
other disclosed matters for which a loss is probable or reasonably
possible, such an estimate is not possible. Those matters for
which an estimate is not possible are not included within this
estimated range. Therefore, the estimated range of possible loss
represents what we believe to be an estimate of possible loss only
for certain matters meeting these criteria. It does not represent
the Corporation’s maximum loss exposure. Information is provided
in Note 13 – Commitments and Contingencies to the Consolidated
Financial Statements regarding the nature of all of these
contingencies and, where specified, the amount of the claim
associated with these loss contingencies.
Consolidation and Accounting for Variable Interest
Entities
In accordance with applicable accounting guidance, an entity that
has a controlling financial interest in a VIE is referred to as the
primary beneficiary and consolidates the VIE. The Corporation is
deemed to have a controlling financial interest and is the primary
beneficiary of a VIE if it has both the power to direct the activities
of the VIE that most significantly impact the VIE’s economic
performance and an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the VIE.
Determining whether an entity has a controlling financial
interest in a VIE requires significant judgment. An entity must
assess the purpose and design of the VIE, including explicit and
implicit contractual arrangements, and the entity’s involvement in
both the design of the VIE and its ongoing activities. The entity
must then determine which activities have the most significant
impact on the economic performance of the VIE and whether the
entity has the power to direct such activities. For VIEs that hold
financial assets, the party that services the assets or makes
investment management decisions may have the power to direct
the most significant activities of a VIE. Alternatively, a third party
that has the unilateral right to replace the servicer or investment
manager or to liquidate the VIE may be deemed to be the party
with power. If there are no significant ongoing activities, the party
that was responsible for the design of the VIE may be deemed to
have power. If the entity determines that it has the power to direct
the most significant activities of the VIE, then the entity must
determine if it has either an obligation to absorb losses or the
right to receive benefits that could potentially be significant to the
VIE. Such economic interests may include investments in debt or
equity instruments issued by the VIE, liquidity commitments, and
explicit and implicit guarantees.
On a quarterly basis, we reassess whether we have a controlling
financial interest and are the primary beneficiary of a VIE. The
quarterly reassessment process considers whether we have
acquired or divested the power to direct the activities of the VIE
through changes in governing documents or other circumstances.
The reassessment also considers whether we have acquired or
disposed of a financial interest that could be significant to the VIE,
or whether an interest in the VIE has become significant or is no
longer significant. The consolidation status of the VIEs with which
we are involved may change as a result of such reassessments.
Changes in consolidation status are applied prospectively, with
assets and liabilities of a newly consolidated VIE initially recorded
at fair value. A gain or loss may be recognized upon deconsolidation
of a VIE depending on the carrying amounts of deconsolidated
assets and liabilities compared to the fair value of retained
interests and ongoing contractual arrangements.