Wells Fargo 2010 Annual Report Download - page 114

Note 1: Summary of Significant Accounting Policies (continued)
ASU 2009-16 (FAS 166) modifies certain guidance contained
in ASC 860, Transfers and Servicing. This pronouncement
eliminates the concept of qualifying special purpose entities
(QSPEs) and provides additional criteria transferors must use to
evaluate transfers of financial assets. The Update also requires
that any assets or liabilities retained from a transfer accounted
for as a sale must be initially recognized at fair value. We
adopted this guidance in first quarter 2010 with prospective
application for transfers that occurred on and after
January 1, 2010.
ASU 2009-17 (FAS 167) amends several key consolidation
provisions related to variable interest entities (VIEs), which are
included in ASC 810, Consolidation. The scope of the new
guidance includes entities that were previously designated as
QSPEs. The Update also changes the approach companies must
use to identify VIEs for which they are deemed to be the primary
beneficiary and are required to consolidate. Under the new
guidance, a VIE's primary beneficiary is the entity that has the
power to direct the VIE's significant activities, and has an
obligation to absorb losses or the right to receive benefits that
could be potentially significant to the VIE. The Update also
requires companies to continually reassess whether they are the
primary beneficiary of a VIE, whereas the previous rules only
required reconsideration upon the occurrence of certain
triggering events. We adopted this guidance in first quarter
2010, which resulted in the consolidation of $18.6 billion of
incremental assets onto our consolidated balance sheet and a
$183 million increase to beginning retained earnings as a
cumulative effect adjustment.
We also elected the fair value option for those newly
consolidated VIEs for which our interests, prior to
January 1, 2010, were predominantly carried at fair value with
changes in fair value recorded to earnings. Accordingly, the fair
value option was elected to effectively continue fair value
accounting through earnings for those interests. Conversely, we
did not elect the fair value option for those newly consolidated
VIEs that did not share these characteristics. At January 1, 2010,
the fair value of loans and long-term debt for which we elected
the fair value option was $1.0 billion and $1.0 billion,
respectively. The incremental impact of electing the fair value
option (compared to not electing) on the cumulative effect
adjustment to retained earnings was an increase of $15 million.
See Notes 8 and 16 for additional information.
ASU 2010-10 amends consolidation accounting guidance to
defer indefinitely the application of ASU 2009-17 to certain
investment funds. The amendment was effective for us in first
quarter 2010. As a result, we did not consolidate any investment
funds upon adoption of ASU 2009-17.
ASU 2010-18 provides guidance for modified PCI loans that are
accounted for within a pool. Under the new guidance, modified
PCI loans should not be removed from a pool even if those loans
would otherwise be deemed troubled debt restructurings
(TDRs). The Update also clarifies that entities should consider
the impact of modifications on a pool of PCI loans when
evaluating that pool for impairment. These accounting changes
were effective for us in third quarter 2010. Our adoption of the
Update did not affect our consolidated financial statement
results, as the new guidance is consistent with our previous
accounting practice.
ASU 2010-11 provides guidance clarifying when entities should
evaluate embedded credit derivative features in financial
instruments issued from structures such as collateralized debt
obligations (CDOs) and synthetic CDOs. The Update clarifies
that bifurcation and separate accounting is not required for
embedded credit derivative features that are only related to the
transfer of credit risk that occurs when one financial instrument
is subordinate to another. Embedded derivatives related to other
types of credit risk must be analyzed to determine the
appropriate accounting treatment. The guidance also allows
companies to elect fair value option upon adoption for any
investment in a beneficial interest in securitized financial assets.
By making this election, companies would not be required to
evaluate whether embedded credit derivative features exist for
those interests. This guidance was effective for us in third
quarter 2010. In conjunction with our adoption of this standard,
we recorded a $28 million decrease to beginning retained
earnings as a cumulative effect adjustment.
ASU 2010-20 requires enhanced disclosures for the allowance
for credit losses and financing receivables, which include certain
loans and long-term accounts receivable. Companies are
required to disaggregate credit quality information, including
receivables on nonaccrual status and aging of past due
receivables by class of financing receivable, and roll forward the
allowance for credit losses by portfolio segment. Portfolio
segment is the level at which an entity develops and documents a
systematic method to determine its allowance for credit losses.
Class of financing receivable is generally a disaggregation of
portfolio segment. This guidance was effective for us in fourth
quarter 2010 with prospective application. Companies must also
provide supplemental information on the nature and extent of
TDRs and their effect on the allowance for credit losses. Under
ASU 2011-01, Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20, these
TDR disclosures have been deferred to coincide with a separate
FASB TDR project, with an expected effective date in second
quarter 2011. Our adoption did not affect our consolidated
financial statement results since it amends only the disclosure
requirements for financing receivables and the allowance for
credit losses.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our majority-owned subsidiaries and VIEs
(defined below) in which we are the primary beneficiary.
Significant intercompany accounts and transactions are
eliminated in consolidation. If we own at least 20% of an entity,
we generally account for the investment using the equity
method. If we own less than 20% of an entity, we generally carry
the investment at cost, except marketable equity securities,
which we carry at fair value with changes in fair value included
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