Bank of America 2013 Annual Report Download - page 120

118 Bank of America 2013
compared the fair value of each reporting unit to its estimated
carrying value as measured by allocated equity, which includes
goodwill. During our 2013 annual goodwill impairment test, we
also evaluated the U.K. Card business, which is a reporting unit,
within All Other, as the U.K. Card business comprises the majority
of the goodwill included in All Other. To determine fair value, we
utilized a combination of the market approach and the 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, 2013 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, 2013 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 (5.4) percent to
11.4 percent.
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 fair value exceeded their
carrying value indicating there was no impairment.
As described above, during the three months ended June 30,
2013, the consumer DFS business was moved from Global Banking
to CBB and subsequently constitutes a new separate reporting
unit. The goodwill allocated to this reporting unit was reviewed for
impairment as part of the goodwill testing process. Based on the
results of step one of the annual goodwill impairment test, we
determined that the fair value of the reporting unit exceeded its
carrying value. Although not required, given the recent move and
the results of step one, and to further substantiate the value of
goodwill, we performed step two of the goodwill impairment test
for this reporting unit. The fair value of the reporting unit was
estimated based on the income approach. Significant
assumptions for the valuation of consumer DFS under the income
approach included cash flow estimates, including expected new
account growth, the discount rate and the terminal value. In
performing step two, significant assumptions used in measuring
the fair value of the assets and liabilities of the reporting unit
included discount rates, loss rates and interest rates. The results
of step two further supported that the goodwill for the consumer
DFS reporting unit was not impaired.
On July 31, 2013, the U.S. District Court for the District of
Columbia issued a ruling regarding the Federal Reserve’s rules
implementing the Financial Reform Act’s Durbin Amendment. The
ruling requires the Federal Reserve to reconsider the $0.21 per
transaction cap on debit card interchange fees. The Federal
Reserve is appealing the ruling and final resolution is expected in
the first half of 2014. In performing the annual goodwill impairment
test for Card Services within CBB, we considered the impact of the
recent ruling in determining the fair value of the reporting unit and,
assuming the range initially included in the Federal Reserve’s rule
is used for forecasting interchange fees, no goodwill impairment
would result. If the Federal Reserve, upon final resolution,
implements a lower per transaction cap than the initial range, it
may have a significant adverse impact on our debit card
interchange fee revenue and the associated goodwill allocated to
the Card Services reporting unit.
2012 Annual Impairment Tests
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.
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.
Representations and Warranties Liability
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 or decrease of approximately $550 million in the
representations and warranties liability as of December 31, 2013.
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 more information on representations and warranties
exposure and the corresponding estimated range of possible loss,
see Off-Balance Sheet Arrangements and Contractual Obligations
– Representations and Warranties on page 48, as well as Note 7
– Representations and Warranties Obligations and Corporate
Guarantees and Note 12 – Commitments and Contingencies to the
Consolidated Financial Statements.