Wells Fargo 2012 Annual Report Download - page 103

weighting both external and internal indications of value to
determine if the instrument is classified as Level 2 or Level 3.
Otherwise, the classification of Level 2 or Level 3 is based upon
the specific facts and circumstances of each instrument or
instrument category and judgments are made regarding the
significance of the Level 3 inputs to the instruments’ fair value
measurement in its entirety. If Level 3 inputs are considered
significant, the instrument is classified as Level 3.
Our financial assets valued using Level 3 measurements
consist of certain collateralized debt obligations (CDOs),
collateralized loan obligations (CLOs), asset-backed securities,
including those collateralized by auto leases or loans, cash
reserves, and other asset-backed securities, auction-rate
securities, certain derivative contracts such as credit default
swaps related to collateralized mortgage obligation (CMO), CDO
and CLO exposures and certain MHFS, certain loans, and MSRs.
For additional information on how we value MSRs refer to the
discussion earlier in this section.
Table 51 presents the summary of the fair value of financial
instruments recorded at fair value on a recurring basis, and the
amounts measured using significant Level 3 inputs (before
derivative netting adjustments). The fair value of the remaining
assets and liabilities were measured using valuation
methodologies involving market-based or market-derived
information (collectively Level 1 and 2 measurements).
Table 51: Fair Value Level 3 Summary
December 31, 2012 December 31, 2011
Total Total
($ in billions) balance Level 3 (1) balance Level 3 (1)
Assets carried
at fair value $ 358.7 51.9 373.0 53.3
As a percentage
of total assets 25 % 4 28 4
Liabilities carried
at fair value $ 22.4 3.1 26.4 4.6
As a percentage of
total liabilities 2 % * 2 *
* Less than 1%.
(1) Before derivative netting adjustments.
See Note 17 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report for a complete discussion on our fair
valuation of financial instruments, our related measurement
techniques and the impact to our financial statements.
Income Taxes
We are subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which we
operate. Our income tax expense consists of current and deferred
income tax expense. Current income tax expense represents our
estimated taxes to be paid or refunded for the current period and
includes income tax expense related to our uncertain tax
positions. We determine deferred income taxes using the balance
sheet method. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the
book and tax bases of assets and liabilities, and recognizes
enacted changes in tax rates and laws in the period in which they
occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax
assets are recognized subject to management’s judgment that
realization is “more likely than not.” Uncertain tax positions that
meet the more likely than not recognition threshold are
measured to determine the amount of benefit to recognize. An
uncertain tax position is measured at the largest amount of
benefit that management believes has a greater than 50%
likelihood of realization upon settlement. Tax benefits not
meeting our realization criteria represent unrecognized tax
benefits. Our unrecognized tax benefits on uncertain tax
positions are reflected in Note 21 (Income Taxes) to Financial
Statements in this Report. Foreign taxes paid are generally
applied as credits to reduce federal income taxes payable. We
account for interest and penalties as a component of income tax
expense.
The income tax laws of the jurisdictions in which
we operate are complex and subject to different interpretations
by the taxpayer and the relevant government taxing authorities.
In establishing a provision for income tax expense, we must
make judgments and interpretations about the application of
these inherently complex tax laws. We must also make estimates
about when in the future certain items will affect taxable income
in the various tax jurisdictions by the government taxing
authorities, both domestic and foreign. Our interpretations may
be subjected to review during examination by taxing authorities
and disputes may arise over the respective tax positions. We
attempt to resolve these disputes during the tax examination and
audit process and ultimately through the court systems when
applicable.
We monitor relevant tax authorities and revise our estimate of
accrued income taxes due to changes in income tax laws and
their interpretation by the courts and regulatory authorities on a
quarterly basis. Revisions of our estimate of accrued income
taxes also may result from our own income tax planning and
from the resolution of income tax controversies. Such revisions
in our estimates may be material to our operating results for any
given quarter.
See Note 21 (Income Taxes) to Financial Statements in this
Report for a further description of our provision for income taxes
and related income tax assets and liabilities.
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