Citigroup Inc.

in Accumulated other comprehensive income (loss) and are included inearnings of future periods when the hedged cash flows impact earnings.However, if it becomes probable that the hedged forecasted transactionwill not likely occur, any amounts that remain in Accumulated othercomprehensive income (loss) are immediately reflected in Other revenue.Employee Benefits ExpenseEmployee benefits expense includes current service costs of pension andother postretirement benefit plans, which are accrued on a current basis,contributions and unrestricted awards under other employee plans, theamortization of restricted stock awards and costs of other employee benefits.Stock-Based CompensationThe Company recognizes compensation expense related to stock andoption awards over the requisite service period based on the instruments’grant date fair value, reduced by expected forfeitures. Compensation costrelated to awards granted to employees who meet certain age plus yearsof-servicerequirements (retirement eligible employees) is accrued in theyear prior to the grant date, in the same manner as the accrual for cashincentive compensation.Income TaxesThe Company is subject to the income tax laws of the U.S., its states andmunicipalities and those of the foreign jurisdictions in which the Companyoperates. These tax laws are complex and subject to different interpretationsby the taxpayer and the relevant governmental taxing authorities. Inestablishing a provision for income tax expense, the Company must makejudgments and interpretations about the application of these inherentlycomplex tax laws. The Company must also make estimates about whenin the future certain items will affect taxable income in the various taxjurisdictions, both domestic and foreign.Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may besettled with the taxing authority upon examination or audit.The Company treats interest and penalties on income taxes as acomponent of Income tax expense.Deferred taxes are recorded for the future consequences of events thathave been recognized for financial statements or tax returns, based uponenacted tax laws and rates. Deferred tax assets are recognized subject tomanagement’s judgment that realization is more likely than not. FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48) (now ASC 740, Income Taxes), sets out a consistent framework todetermine the appropriate level of tax reserves to maintain for uncertaintax positions. This interpretation uses a two-step approach wherein a taxbenefit is recognized if a position is more likely than not to be sustained.The amount of the benefit is then measured to be the highest tax benefitthat is greater than 50% likely to be realized. FIN 48 also sets out disclosurerequirements to enhance transparency of an entity’s tax reserves.See Note 10 to the Consolidated Financial Statements for a furtherdescription of the Company’s provision and related income tax assetsand liabilities.Commissions, Underwriting and Principal TransactionsCommissions, underwriting and principal transactions revenues and relatedexpenses are recognized in income on a trade-date basis.Earnings per ShareEarnings per share (EPS) is computed after deducting preferred stockdividends. The Company has granted restricted and deferred share awardsthat are considered to be participating securities, which constitute a secondclass of common stock. Accordingly, a portion of Citigroup’s earnings isallocated to the second class of common stock in the EPS calculation.Basic earnings per share is computed by dividing income available tocommon stockholders after the allocation of dividends and undistributedearnings to the second class of common stock by the weighted averagenumber of common shares outstanding for the period. Diluted earnings pershare reflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised. It is computed after givingconsideration to the weighted average dilutive effect of the Company’s stockoptions and warrants, convertible securities, T-DECs, and the shares thatcould have been issued under the Company’s Management Committee Long-Term Incentive Plan and after the allocation of earnings to the second classof common stock.Use of EstimatesManagement must make estimates and assumptions that affect theConsolidated Financial Statements and the related footnote disclosures. Suchestimates are used in connection with certain fair value measurements. SeeNote 25 to the Consolidated Financial Statements for further discussions onestimates used in the determination of fair value. The Company also usesestimates in determining consolidation decisions for special-purpose entitiesas discussed in Note 22. Moreover, estimates are significant in determiningthe amounts of other-than-temporary impairments, impairments of goodwilland other intangible assets, provisions for probable losses that may arisefrom credit-related exposures and probable and estimable losses related tolitigation and regulatory proceedings, and tax reserves. While managementmakes its best judgment, actual amounts or results could differ from thoseestimates. Current market conditions increase the risk and complexity of thejudgments in these estimates.Cash FlowsCash equivalents are defined as those amounts included in cash and duefrom banks. Cash flows from risk management activities are classified inthe same category as the related assets and liabilities. The ConsolidatedStatement of Cash Flows line item Capital expenditures on premises andequipment and capitalized software includes capitalized software costs of$1.2 billion, $1.1 billion and $1.2 billion for December 31, 2010, 2009 and2008, respectively. These balances were previously included in the line itemOther, net.Related Party TransactionsThe Company has related party transactions with certain of its subsidiariesand affiliates. These transactions, which are primarily short-term in nature,include cash accounts, collateralized financing transactions, marginaccounts, derivative trading, charges for operational support and theborrowing and lending of funds, and are entered into in the ordinary courseof business.168