Citigroup Inc.

SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATESNote 1 to the Consolidated Financial Statements contains a summary ofCitigroup’s significant accounting policies, including a discussion of recentlyissued accounting pronouncements. These policies, as well as estimatesmade by management, are integral to the presentation of Citi’s operationsand financial condition. While all of these policies require a certain level ofmanagement judgment and estimates, this section highlights and discussesthe significant accounting policies that require management to makehighly difficult, complex or subjective judgments and estimates at timesregarding matters that are inherently uncertain and susceptible to change.Management has discussed each of these significant accounting policies, therelated estimates, and its judgments with the Audit Committee of the Board ofDirectors. Additional information about these policies can be found in Note 1to the Consolidated Financial Statements.VALUATIONS OF FINANCIAL INSTRUMENTSCitigroup holds fixed income and equity securities, derivatives, retainedinterests in securitizations, investments in private equity, and other financialinstruments. In addition, Citigroup purchases securities under agreementsto resell and sells securities under agreements to repurchase. Citigroup holdsits investments, trading assets and liabilities, and resale and repurchaseagreements on the Consolidated Balance Sheet to meet customer needs, tomanage liquidity needs and interest rate risks, and for proprietary tradingand private equity investing.Substantially all of the assets and liabilities described in the precedingparagraph are reflected at fair value on Citigroup’s Consolidated BalanceSheet. In addition, certain loans, short-term borrowings, long-term debt anddeposits as well as certain securities borrowed and loaned positions that arecollateralized with cash are carried at fair value. Approximately 37.3% and37.6% of total assets, and 16.6% and 16.5% of total liabilities are accountedfor at fair value as of December 31, 2010 and 2009, respectively.When available, Citi generally uses quoted market prices to determinefair value and classifies such items within Level 1 of the fair value hierarchyestablished under ASC 820-10, Fair Value Measurements and Disclosures(see Note 25 to the Consolidated Financial Statements). If quoted marketprices are not available, fair value is based upon internally developedvaluation models that use, where possible, current market-based orindependently sourced market parameters, such as interest rates, currencyrates, option volatilities, etc. Where a model is internally developed andused to price a significant product, it is subject to validation and testing byindependent personnel. Such models are often based on a discounted cashflow analysis. In addition, items valued using such internally generatedvaluation techniques are classified according to the lowest level input orvalue driver that is significant to the valuation. Thus, an item may beclassified in Level 3 even though there may be some significant inputs thatare readily observable.The credit crisis caused some markets to become illiquid, thus reducingthe availability of certain observable data used by Citigroup’s valuationtechniques. This illiquidity, in at least certain markets, continued through2010. When or if liquidity returns to these markets, the valuations will revertto using the related observable inputs in verifying internally calculatedvalues. For additional information on Citigroup’s fair value analysis, see“Managing Global Risk” and “Balance Sheet Review.”Recognition of Changes in Fair ValueChanges in the valuation of the trading assets and liabilities, as well asall other assets (excluding available-for-sale securities and derivatives inqualifying cash flow hedging relationships) and liabilities carried at fairvalue are recorded in the Consolidated Statement of Income. Changes inthe valuation of available-for-sale securities, other than write-offs andcredit impairments, and the effective portion of changes in the valuationof derivatives in qualifying cash flow hedging relationships, generally arerecorded in Accumulated other comprehensive income (loss) (AOCI),which is a component of Stockholders’ equity on the Consolidated BalanceSheet. A full description of Citi’s related policies and procedures can be foundin Notes 1, 25, 26 and 27 to the Consolidated Financial Statements.Evaluation of Other-than-Temporary ImpairmentCitigroup conducts and documents periodic reviews of all securitieswith unrealized losses to evaluate whether the impairment is other thantemporary. Prior to January 1, 2009, these reviews were conducted pursuantto FSP FAS 115-2 and FAS 124-2 (now ASC 320-10-35, Investments—Debtand Equity Securities: Subsequent Measurement). Any unrealized lossidentified as other than temporary was recorded directly in the ConsolidatedStatement of Income. As of January 1, 2009, Citigroup adopted ASC 320-10.Accordingly, any credit-related impairment related to debt securities that Citidoes not plan to sell and is not likely to be required to sell is recognized in theConsolidated Statement of Income, with the non-credit-related impairmentrecognized in AOCI. For other impaired debt securities, the entire impairmentis recognized in the Consolidated Statement of Income. An unrealized lossexists when the current fair value of an individual security is less than itsamortized cost basis. Unrealized losses that are determined to be temporaryin nature are recorded, net of tax, in AOCI for available-for-sale securities,while such losses related to held-to-maturity securities are not recorded, asthese investments are carried at their amortized cost (less any other-thantemporaryimpairment). For securities transferred to held-to-maturity fromTrading account assets, amortized cost is defined as the fair value amountof the securities at the date of transfer. For securities transferred to held-tomaturityfrom available-for-sale, amortized cost is defined as the originalpurchase cost, plus or minus any accretion or amortization of interest, lessany impairment recognized in earnings.Regardless of the classification of the securities as available-for-sale orheld-to-maturity, Citi has assessed each position for credit impairment.For a further discussion, see Note 15 to the Consolidated Financial Statements.134