Wells Fargo 2012 Annual Report Download - page 138

Note 1: Summary of Significant Accounting Policies (continued)
the period of, estimated net servicing income. The amortization
of MSRs is reported in noninterest income, analyzed monthly
and adjusted to reflect changes in prepayment speeds, as well as
other factors.
MSRs accounted for at LOCOM are periodically evaluated for
impairment based on the fair value of those assets. For purposes
of impairment evaluation and measurement, we stratify MSRs
based on the predominant risk characteristics of the underlying
loans, including investor and product type. If, by individual
stratum, the carrying amount of these MSRs exceeds fair value, a
valuation reserve is established. The valuation reserve is
adjusted as the fair value changes.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Capital leases, where we are the
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life or lease term for leasehold
improvements. We amortize capitalized leased assets on a
straight-line basis over the lives of the respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment at a reporting unit level
on an annual basis or more frequently in certain circumstances.
We have determined that our reporting units are one level below
the operating segments. We have the option of performing a
qualitative assessment of goodwill. We may also elect to bypass
the qualitative test and proceed directly to a quantitative test.
We initially perform a qualitative assessment of goodwill to test
for impairment. If, based on our qualitative review, we conclude
that more likely than not a reporting unit’s fair value is less than
its carrying amount, then we complete quantitative steps as
described below to determine if there is goodwill impairment. If
we conclude that a reporting unit’s fair value is not less than its
carrying amount, quantitative tests are not required. We assess
goodwill for impairment on a reporting unit level and apply
various quantitative valuation methodologies when required to
compare the estimated fair value to the carrying value of each
reporting unit. Valuation methodologies include discounted cash
flow and earnings multiple approaches. If the fair value is less
than the carrying amount, an additional test is required to
measure the amount of impairment. We recognize impairment
losses as a charge to noninterest expense (unless related to
discontinued operations) and an adjustment to the carrying
value of the goodwill asset. Subsequent reversals of goodwill
impairment are prohibited.
We amortize core deposit and other customer relationship
intangibles on an accelerated basis over useful lives not
exceeding 10 years. We review such intangibles for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Impairment is
indicated if the sum of undiscounted estimated future net cash
flows is less than the carrying value of the asset. Impairment is
permanently recognized by writing down the asset to the extent
that the carrying value exceeds the estimated fair value.
Operating Lease Assets
Operating lease rental income for leased assets is recognized in
other income on a straight-line basis over the lease term. Related
depreciation expense is recorded on a straight-line basis over the
estimated useful life, considering the estimated residual value of
the leased asset. The useful life may be adjusted to the term of
the lease depending on our plans for the asset after the lease
term. On a periodic basis, leased assets are reviewed for
impairment. Impairment loss is recognized if the carrying
amount of leased assets exceeds fair value and is not recoverable.
The carrying amount of leased assets is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to
result from the lease payments and the estimated residual value
upon the eventual disposition of the equipment.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) Freddie Mac and Fannie Mae (government-sponsored
entities (GSEs)), which include the mortgage loans in GSE-
guaranteed mortgage securitizations, (2) special purpose entities
that issue private label MBS, and (3) other financial institutions
that purchase mortgage loans for investment or private label
securitization. In addition, we pool Federal Housing
Administration (FHA)-insured and Department of Veterans
Affairs (VA)-guaranteed mortgage loans, which back securities
guaranteed by the Government National Mortgage Association
(GNMA).
We may be required to repurchase mortgage loans,
indemnify the securitization trust, investor or insurer, or
reimburse the securitization trust, investor or insurer for credit
losses incurred on loans (collectively “repurchase”) in the event
of a breach of specified contractual representations or warranties
that are not remedied within a period (usually 90 days or less)
after we receive notice of the breach. Our loan sale contracts to
private investors (non-GSE) typically contain an additional
provision where we would only be required to repurchase
securitized loans if a breach is deemed to have a material and
adverse effect on the value of the mortgage loan or to the
investors or interests of security holders in the mortgage loan.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have a repurchase obligation, whether or not we currently
service those loans, based on a combination of factors. Such
factors include default expectations, expected investor
repurchase demands (influenced by current and expected
mortgage loan file requests and mortgage insurance rescission
notices, as well as estimated demand to default and file request
relationships) and appeals success rates (where the investor
rescinds the demand based on a cure of the defect or
acknowledges that the loan satisfies the investor’s applicable
representations and warranties), reimbursement by
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