Bank of America 2015 Annual Report Download - page 103

Bank of America 2015 101
Level 3 financial instruments may be hedged with derivatives
classified as Level 1 or 2; therefore, gains or losses associated
with Level 3 financial instruments may be offset by gains or losses
associated with financial instruments classified in other levels of
the fair value hierarchy. The Level 3 gains and losses recorded in
earnings did not have a significant impact on our liquidity or capital.
We conduct a review of our fair value hierarchy classifications on
a quarterly basis. Transfers into or out of Level 3 are made if the
significant inputs used in the financial models measuring the fair
values of the assets and liabilities became unobservable or
observable, respectively, in the current marketplace. These
transfers are considered to be effective as of the beginning of the
quarter in which they occur. For more information on the significant
transfers into and out of Level 3 during 2015 and 2014, see Note
20 – Fair Value Measurements to the Consolidated Financial
Statements.
Accrued Income Taxes and Deferred Tax Assets
Accrued income taxes, reported as a component of either other
assets or accrued expenses and other liabilities on the
Consolidated Balance Sheet, represent the net amount of current
income taxes we expect to pay to or receive from various taxing
jurisdictions attributable to our operations to date. We currently
file income tax returns in more than 100 jurisdictions and consider
many factors, including statutory, judicial and regulatory guidance,
in estimating the appropriate accrued income taxes for each
jurisdiction.
Consistent with the applicable accounting guidance, we monitor
relevant tax authorities and change our estimate of accrued
income taxes due to changes in income tax laws and their
interpretation by the courts and regulatory authorities. These
revisions of our estimate of accrued income taxes, which also may
result from our income tax planning and from the resolution of
income tax controversies, may be material to our operating results
for any given period.
Net deferred tax assets, reported as a component of other
assets on the Consolidated Balance Sheet, represent the net
decrease in taxes expected to be paid in the future because of
net operating loss (NOL) and tax credit carryforwards and because
of future reversals of temporary differences in the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. NOL and tax credit carryforwards result
in reductions to future tax liabilities, and many of these attributes
can expire if not utilized within certain periods. We consider the
need for valuation allowances to reduce net deferred tax assets
to the amounts that we estimate are more-likely-than-not to be
realized.
While we have established valuation allowances for certain
state and non-U.S. deferred tax assets, we have concluded that
no valuation allowance was necessary with respect to nearly all
U.S. federal and U.K. deferred tax assets, including NOL and tax
credit carryforwards. The majority of U.K. net deferred tax assets,
which consist primarily of NOLs, are expected to be realized by
certain subsidiaries over an extended number of years.
Management’s conclusion is supported by financial results and
forecasts, the reorganization of certain business activities and the
indefinite period to carry forward NOLs. However, significant
changes to our estimates, such as changes that would be caused
by substantial and prolonged worsening of the condition of
Europe’s capital markets, or to applicable tax laws, such as laws
affecting the realizability of NOLs or other deferred tax assets,
could lead management to reassess its U.K. valuation allowance
conclusions. See Note 19 – Income Taxes to the Consolidated
Financial Statements for a table of significant tax attributes and
additional information. For more information, see page 14 under
Item 1A. Risk Factors of our 2015 Annual Report on Form 10-K.
Goodwill and Intangible Assets
Background
The nature of and accounting for goodwill and intangible assets
are discussed in Note 1 – Summary of Significant Accounting
Principles and Note 8 – Goodwill and Intangible Assets to the
Consolidated Financial Statements. Goodwill is reviewed for
potential impairment at the reporting unit level on an annual basis,
which for the Corporation is as of June 30, and in interim periods
if events or circumstances indicate a potential impairment. A
reporting unit is an operating segment or one level below. As
reporting units are determined after an acquisition or evolve with
changes in business strategy, goodwill is assigned to reporting
units and it no longer retains its association with a particular
acquisition. All of the revenue streams and related activities of a
reporting unit, whether acquired or organic, are available to support
the value of the goodwill.
Effective January 1, 2015, the Corporation changed its basis
of presentation related to its business segments. The realignment
triggered a test for goodwill impairment, which was performed both
immediately before and after the realignment. In performing the
goodwill impairment test, the Corporation compared the fair value
of the affected reporting units with their carrying value as
measured by allocated equity. The fair value of the affected
reporting units exceeded their carrying value and, accordingly, no
goodwill impairment resulted from the realignment.
2015 Annual Impairment Test
Estimating the fair value of reporting units is a subjective process
that involves the use of estimates and judgments, particularly
related to cash flows, the appropriate discount rates and an
applicable control premium. We determined the fair values of the
reporting units using a combination of valuation techniques
consistent with the market approach and the income approach
and also utilized independent valuation specialists.
The market approach we used estimates the fair value of the
individual reporting units by incorporating any combination of the
tangible capital, book capital and earnings multiples from
comparable publicly-traded companies in industries similar to the
reporting unit. The relative weight assigned to these multiples
varies among the reporting units based on qualitative and
quantitative characteristics, primarily the size and relative
profitability of the reporting unit as compared to the comparable
publicly-traded companies. Since the fair values determined under
the market approach are representative of a noncontrolling
interest, we added a control premium to arrive at the reporting
units’ estimated fair values on a controlling basis.
For purposes of the income approach, we calculated
discounted cash flows by taking the net present value of estimated
future cash flows and an appropriate terminal value. Our
discounted cash flow analysis employs a capital asset pricing
model in estimating the discount rate (i.e., cost of equity financing)
for each reporting unit. The inputs to this model include the risk-
free rate of return, beta, which is a measure of the level of non-
diversifiable risk associated with comparable companies for each