Citigroup Inc.

The results of the July 1, 2010 test validated that the fair values exceededthe carrying values for all reporting units. Citi is also required to testgoodwill for impairment whenever events or circumstances make it morelikely than not that impairment may have occurred, such as a significantadverse change in the business climate, a decision to sell or dispose of allor a significant portion of a reporting unit, or a significant decline in Citi’sstock price. An interim goodwill impairment test was performed for theBrokerage and Asset Management reporting unit as of May 1, 2010 in lightof significant sales transactions impacting the size of the reporting unit.Results of the test indicated no goodwill impairment. Based on negativeregulatory changes during 2010, including the penalty fee provisionassociated with the Credit Card Accountability Responsibility and DisclosureAct of 2009 (CARD Act), Citigroup performed an interim impairment test forits Local Consumer Lending—Cards reporting unit as of May 31, 2010.The test validated that the fair value of the reporting unit was in excess ofthe associated carrying value and, therefore, that there was no indication ofgoodwill impairment.Since none of the Company’s reporting units are publicly traded,individual reporting unit fair value determinations cannot be directlycorrelated to Citigroup’s stock price. The sum of the fair values of thereporting units at July 1, 2010 significantly exceeded the overall marketcapitalization of Citi as of July 1, 2010. However, Citi believes that it wasnot meaningful to reconcile the sum of the fair values of the Company’sreporting units to its market capitalization during the 2010 annualimpairment test performed on July 1, 2010 due to several factors. Thesefactors, which do not directly impact the individual reporting unit fair valuesas of July 1, 2010, included the continued economic stake and influence heldby the U.S. government in Citi at the time the annual test was performed. Inaddition, the market capitalization of Citigroup reflects the execution riskin a transaction involving Citigroup due to its size. However, the individualreporting units’ fair values are not subject to the same level of execution riskor a business model that is perceived to be complex.While no impairment was noted in step one of Citigroup’s LocalConsumer Lending—Cards reporting unit impairment test at July 1,2010, goodwill present in the reporting unit may be sensitive to furtherdeterioration as the valuation of the reporting unit is particularly dependentupon economic conditions that affect consumer credit risk and behavior.Citigroup engaged the services of an independent valuation specialist to assistin the valuation of the reporting unit at July 1, 2010, using a combinationof the market approach and income approach consistent with the valuationmodel used in past practice, which considered the impact of the penalty feeprovisions associated with the CARD Act that were implemented during 2010.Under the market approach for valuing this reporting unit, the keyassumption is the selected price multiple. The selection of the multipleconsiders the operating performance and financial condition of the LocalConsumer Lending—Cards operations as compared with those of a groupof selected publicly traded guideline companies and a group of selectedacquired companies. Among other factors, the level and expected growth inreturn on tangible equity relative to those of the guideline companies andguideline transactions is considered. Since the guideline company pricesused are on a minority interest basis, the selection of the multiple considersthe guideline acquisition prices which reflect control rights and privileges inarriving at a multiple that reflects an appropriate control premium.For the Local Consumer Lending—Cards valuation under the incomeapproach, the assumptions used as the basis for the model include cashflows for the forecasted period, the assumptions embedded in arriving atan estimation of the terminal value and the discount rate. The cash flowsfor the forecasted period are estimated based on management’s most recentprojections available as of the testing date, giving consideration to targetedequity capital requirements based on selected public guideline companiesfor the reporting unit. In arriving at the terminal value for Local ConsumerLending—Cards, using 2013 as the terminal year, the assumptions usedincluded a long-term growth rate and a price-to-tangible book multiplebased on selected public guideline companies for the reporting unit. Thediscount rate is based on the reporting unit’s estimated cost of equity capitalcomputed under the capital asset pricing model.Embedded in the key assumptions underlying the valuation model,described above, is the inherent uncertainty regarding the possibilitythat economic conditions may deteriorate or other events will occur thatwill impact the business model for Local Consumer Lending—Cards.While there is inherent uncertainty embedded in the assumptions used indeveloping management’s forecasts, the Company utilized a discount rate atJuly 1, 2010 that it believes reflects the risk characteristics and uncertaintyspecific to management’s forecasts and assumptions for the Local ConsumerLending—Cards reporting unit.Two primary categories of events exist—economic conditions in theU.S. and regulatory actions—which, if they were to turn out worse thanmanagement has projected, could negatively affect key assumptions used inthe valuation of Local Consumer Lending—Cards. Small deteriorationin the assumptions used in the valuations, in particular the discount-rateand growth-rate assumptions used in the net income projections, couldsignificantly affect Citigroup’s impairment evaluation and, hence, results.If the future were to differ adversely from management’s best estimate ofkey economic assumptions, and associated cash flows were to decrease by asmall margin, Citi could potentially experience future material impairmentcharges with respect to the goodwill remaining in its Local ConsumerLending—Cards reporting unit. Any such charges, by themselves, wouldnot negatively affect Citi’s Tier 1 Capital, Tier 1 Common or Total Capitalregulatory ratios, or Tier 1 Common ratio, its Tangible Common Equity orCiti’s liquidity position.139