Citigroup Inc.

GOODWILLCitigroup has recorded on its Consolidated Balance Sheet Goodwillof $26.2 billion (1.4% of assets) and $25.4 billion (1.4% of assets) atDecember 31, 2010 and December 31, 2009, respectively. No goodwillimpairment was recorded during 2009 and 2010. A $9.6 billion goodwillimpairment charge was recorded in 2008 as a result of testing performedas of December 31, 2008. The impairment was composed of a $2.3 billionpretax charge ($2.0 billion after tax) related to North America RegionalConsumer Bank, a $4.3 billion pretax charge ($4.1 billion after tax) relatedto Latin America Regional Consumer Bank and a $3.0 billion pretaxcharge ($2.6 billion after tax) related to Local Consumer Lending—Other.Goodwill is allocated to Citi’s reporting units at the date the goodwill isinitially recorded. Once goodwill has been allocated to the reporting units,it generally no longer retains its identification with a particular acquisition,but instead becomes identified with the reporting unit as a whole. As a result,all of the fair value of each reporting unit is available to support the value ofgoodwill allocated to the unit. As of December 31, 2010, Citigroup operatedin three core business segments, as discussed. Goodwill impairment testing isperformed at the reporting unit level, one level below the business segment.The reporting unit structure in 2010 was consistent with the reportingunits identified in the second quarter of 2009 as a result of the change inCiti’s organizational structure. During 2010, goodwill was allocated todisposals and tested for impairment under these reporting units. The ninereporting units were North America Regional Consumer Banking, EMEARegional Consumer Banking, Asia Regional Consumer Banking, LATAMRegional Consumer Banking, Securities and Banking, TransactionServices, Brokerage and Asset Management, Local Consumer Lending—Cards and Local Consumer Lending—Other.Under ASC 350, Intangibles—Goodwill and Other, the goodwillimpairment analysis is done in two steps. The first step requires a comparisonof the fair value of the individual reporting unit to its carrying value,including goodwill. If the fair value of the reporting unit is in excess of thecarrying value, the related goodwill is considered not to be impaired andno further analysis is necessary. If the carrying value of the reporting unitexceeds the fair value, there is an indication of potential impairment and asecond step of testing is performed to measure the amount of impairment, ifany, for that reporting unit.When required, the second step of testing involves calculating the impliedfair value of goodwill for each of the affected reporting units. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination, which is the excess of thefair value of the reporting unit determined in step one over the fair valueof the net assets and identifiable intangibles as if the reporting unit werebeing acquired. If the amount of the goodwill allocated to the reporting unitexceeds the implied fair value of the goodwill in the pro forma purchase priceallocation, an impairment charge is recorded for the excess. A recognizedimpairment charge subsequently cannot exceed the amount of goodwillallocated to a reporting unit and cannot be reversed even if the fair value ofthe reporting unit recovers.Goodwill impairment testing involves management judgment, requiringan assessment of whether the carrying value of the reporting unit can besupported by the fair value of the individual reporting unit using widelyaccepted valuation techniques, such as the market approach (earningsmultiples and/or transaction multiples) and/or the income approach(discounted cash flow (DCF) method). In applying these methodologies, Citiutilizes a number of factors, including actual operating results, futurebusiness plans, economic projections, and market data. Managementmay engage an independent valuation specialist to assist in Citi’svaluation process.As a result of significant adverse changes during 2008 in certain Citigroupreporting units, and the increase in financial sector volatility primarily in theU.S., Citigroup engaged the services of an independent valuation specialistto assist in Citi’s valuation of all or a portion of the following reportingunits during 2009—North America Regional Consumer Banking, LatinAmerica Regional Consumer Banking, Securities and Banking, LocalConsumer Lending—Cards and Local Consumer Lending—Other. Inaddition to employing the market approach for estimating the fair valuefor the selected reporting units in 2009, the DCF method was incorporatedto ensure reliability of results. Consistent with 2009, Citigroup engaged theservices of an independent valuation specialist in 2010 to assist in Citi’svaluation of the same reporting units employing both the market approachand DCF method. Citi believes that the DCF method, using managementprojections for the selected reporting units and an appropriate risk-adjusteddiscount rate, is most reflective of a market participant’s view of fair valuesgiven current market conditions. For the reporting units where both methodswere utilized in 2010, the resulting fair values were relatively consistent andappropriate weighting was given to outputs from both methods.The DCF method used at the time of each impairment test used discountrates that Citi believes adequately reflected the risk and uncertainty in thefinancial markets generally and specifically in the internally generated cashflow projections. The DCF method employs a capital asset pricing model inestimating the discount rate. Citi continues to value the remaining reportingunits where it believes the risk of impairment to be low, using primarily themarket approach.Citi prepares a formal three-year strategic plan for its businesses on anannual basis. These projections incorporate certain external economicprojections developed at the point in time the strategic plan is developed. Forthe purpose of performing any impairment test, the three-year forecast isupdated by Citi to reflect current economic conditions as of the testing date.Citi used updated long-range financial forecasts as a basis for its annualgoodwill impairment test performed as of July 1, 2010.138