Bank of America 2012 Annual Report Download - page 167

Bank of America 2012 165
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are
recognized using the straight-line method over the estimated
useful lives of the assets. Estimated lives range up to 40 years
for buildings, up to 12 years for furniture and equipment, and the
shorter of lease term or estimated useful life for leasehold
improvements.
The Corporation capitalizes the costs associated with certain
computer hardware, software and internally developed software,
and amortizes the costs over the expected useful life. Direct project
costs of internally developed software are capitalized when it is
probable that the project will be completed and the software will
be used for its intended function.
Mortgage Servicing Rights
The Corporation accounts for consumer-related MSRs at fair value
with changes in fair value recorded in mortgage banking income
(loss), while commercial-related and residential reverse mortgage
MSRs are accounted for using the amortization method (lower of
amortized cost or fair value) with impairment recognized as a
reduction in mortgage banking income (loss). To reduce the
volatility of earnings related to interest rate and market value
fluctuations, U.S. Treasury securities, mortgage-backed securities
(MBS) and derivatives such as options and interest rate swaps
may be used as risk management derivatives to hedge certain
market risks of the MSRs, but are not designated as qualifying
accounting hedges. These instruments are carried at fair value
with changes in fair value recognized in mortgage banking income
(loss).
The Corporation estimates the fair value of consumer MSRs
using a valuation model that calculates the present value of
estimated future net servicing income and, when available, quoted
prices from independent parties. The present value calculation is
accomplished through an option-adjusted spread (OAS) valuation
approach that factors in prepayment risk. This approach consists
of projecting servicing cash flows under multiple interest rate
scenarios and discounting these cash flows using risk-adjusted
discount rates. The key economic assumptions used in MSR
valuations include weighted-average lives of the MSRs and the
OAS levels. The OAS represents the spread that is added to the
discount rate so that the sum of the discounted cash flows equals
the market price; therefore, it is a measure of the extra yield over
the reference discount factor that the Corporation expects to earn
by holding the asset.
Goodwill and Intangible Assets
Goodwill is the purchase premium after adjusting for the fair value
of net assets acquired. Goodwill is not amortized but is reviewed
for potential impairment on an annual basis, or when events or
circumstances indicate a potential impairment, at the reporting
unit level. A reporting unit, as defined under applicable accounting
guidance, is a business segment or one level below a business
segment. The goodwill impairment analysis is a two-step test. The
first step of the goodwill impairment test involves comparing the
fair value of each reporting unit with its carrying amount including
goodwill as measured by allocated equity. In certain
circumstances, the first step may be performed using a qualitative
assessment. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not
impaired; however, if the carrying amount of the reporting unit
exceeds its fair value, the second step must be performed to
measure potential impairment.
The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated
possible impairment. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination, which is the excess of the
fair value of the reporting unit, as determined in the first step, over
the aggregate fair values of the assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business
combination. Measurement of the fair values of the assets and
liabilities of a reporting unit is consistent with the requirements
of the fair value measurements accounting guidance, as described
herein. The adjustments to measure the assets, liabilities and
intangibles at fair value are for the purpose of measuring the
implied fair value of goodwill and such adjustments are not
reflected in the Consolidated Balance Sheet. If the implied fair
value of goodwill exceeds the goodwill assigned to the reporting
unit, there is no impairment. If the goodwill assigned to a reporting
unit exceeds the implied fair value of goodwill, an impairment
charge is recorded for the excess. An impairment loss recognized
cannot exceed the amount of goodwill assigned to a reporting unit.
An impairment loss establishes a new basis in the goodwill and
subsequent reversals of goodwill impairment losses are not
permitted under applicable accounting guidance.
For intangible assets subject to amortization, an impairment
loss is recognized if the carrying amount of the intangible asset
is not recoverable and exceeds fair value. The carrying amount of
the intangible asset is considered not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from
the use of the asset.
Variable Interest Entities
A VIE is an entity that lacks equity investors or whose equity
investors do not have a controlling financial interest in the entity
through their equity investments. The 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. On a quarterly basis,
the Corporation reassesses whether it has a controlling financial
interest in and is the primary beneficiary of a VIE. The quarterly
reassessment process considers whether the Corporation has
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 the Corporation has
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 the Corporation is 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.