Wells Fargo 2013 Annual Report Download - page 114

Critical Accounting Policies (continued)
prices”) which are used to either record the price of an
instrument or to corroborate internally developed prices. We
have processes in place to approve such vendors to ensure
information obtained and valuation techniques used are
appropriate. Once these vendors are approved to provide pricing
information, we monitor and review the results to ensure the fair
values are reasonable and in line with market experience with
similar asset classes. For certain securities, we may use internal
traders to price instruments. Where vendor prices are utilized for
recording the price of an instrument, we determine the most
appropriate and relevant pricing vendor for each security class
and obtain a price from that particular pricing vendor for each
security.
Determination of the fair value of financial instruments using
either vendor prices or internally developed prices is subject to
our internal price validation procedures, which include, but are
not limited to
, one or a combination of the following procedures:
x
x
x
x
x
comparison to pricing vendors (for internally developed
prices) or to other pricing vendors (for vendor developed
prices);
variance analysis of prices;
corroboration of pricing by reference to other independent
market data such as secondary broker quotes and relevant
benchmark indices;
review of pricing by Company personnel familiar with
market liquidity and other market-related conditions; and
investigation of prices on a specific instrument-by-
instrument basis.
For instruments where we utilize vendor prices to record the
price of an instrument, we perform additional procedures. We
evaluate pricing vendors by comparing prices from one vendor to
prices of other vendors for identical or similar instruments and
evaluate the consistency of prices to known market transactions
when determining the level of reliance to be placed on a
particular pricing vendor. Methodologies employed, controls in
place and inputs used by third party pricing vendors are subject
to additional review when such services are provided. This
review may consist of, in part, obtaining and evaluating control
reports issued and pricing methodology materials distributed.
Significant judgment is required to determine whether
certain assets measured at fair value are included in Level 2 or
Level 3. When making this judgment, we consider available
information, including observable market data, indications of
market liquidity and orderliness, and our understanding of the
valuation techniques and significant inputs used. For securities
in inactive markets, we use a predetermined percentage to
evaluate the impact of fair value adjustments derived from
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 collateralized debt obligations (CDOs), certain
collateralized loan obligations (CLOs), asset-backed securities,
auction-rate securities, certain derivative contracts such as
interest rate lock loan commitments on residential MHFS and
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 61 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 61: Fair Value Level 3 Summary
December 31, 2013 December 31, 2012
($ in billions)
Total
balance Level 3 (1)
Total
balance Level 3 (1)
Assets carried
at fair value $ 353.1 37.2 358.7 51.9
As a percentage
of total assets 23 % 2 25 4
Liabilities carried
at fair value $ 22.7 3.7 22.4 3.1
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
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