Citigroup Inc.

ACCOUNTING CHANGESChange in Accounting for Embedded Credit DerivativesIn March 2010, the FASB issued ASU 2010-11, Scope Exception Related toEmbedded Credit Derivatives. The ASU clarifies that certain embeddedderivatives, such as those contained in certain securitizations, CDOs andstructured notes, should be considered embedded credit derivatives subject topotential bifurcation and separate fair value accounting. The ASU allows anybeneficial interest issued by a securitization vehicle to be accounted for underthe fair value option at transition on July 1, 2010.The Company has elected to account for certain beneficial interests issuedby securitization vehicles under the fair value option that are included inthe table below. Beneficial interests previously classified as held-to-maturity(HTM) were reclassified to available-for-sale (AFS) on June 30, 2010, becauseas of that reporting date, the Company did not have the intent to hold thebeneficial interests until maturity.The following table also shows the gross gains and gross losses thatmake up the pretax cumulative-effect adjustment to retained earnings forreclassified beneficial interests, recorded on July 1, 2010:In millions of dollars at June 30, 2010Amortized costJuly 1, 2010Pretax cumulative effect adjustment to Retained earningsGross unrealized lossesrecognized in AOCI (1)Gross unrealized gainsrecognized in AOCIFair valueMortgage-backed securitiesPrime $ 390 $ — $ 49 $ 439Alt-A 550 — 54 604Subprime 221 — 6 227Non-U.S. residential 2,249 — 38 2,287Total mortgage-backed securities $ 3,410 $ — $147 $ 3,557Asset-backed securitiesAuction rate securities $ 4,463 $401 $ 48 $ 4,110Other asset-backed 4,189 19 164 4,334Total asset-backed securities $ 8,652 $420 $212 $ 8,444Total reclassified debt securities $12,062 $420 $359 $12,001(1) All reclassified debt securities with gross unrealized losses were assessed for other-than-temporary-impairment as of June 30, 2010, including an assessment of whether the Company intends to sell the security. Forsecurities that the Company intends to sell, impairment charges of $176 million were recorded in earnings in the second quarter of 2010.Beginning July 1, 2010, the Company elected to account for thesebeneficial interests under the fair value option for various reasons, including:• To reduce the operational burden of assessing beneficial interests forbifurcation under the guidance in the ASU;• Where bifurcation would otherwise be required under the ASU, to avoidthe complicated operational requirements of bifurcating the embeddedderivatives from the host contracts and accounting for each separately.The Company reclassified substantially all beneficial interests wherebifurcation would otherwise be required under the ASU; and• To permit more economic hedging strategies without generating volatilityin reported earnings.Additional Disclosures Regarding Fair ValueMeasurementsIn January 2010, the FASB issued ASU 2010-06, Improving Disclosuresabout Fair Value Measurements. The ASU requires disclosure of theamounts of significant transfers in and out of Levels 1 and 2 of the fair valuehierarchy and the reasons for the transfers. The disclosures are effective forreporting periods beginning after December 31, 2009. The Company adoptedASU 2010-06 as of January 1, 2010. The required disclosures are included inNote 25. Additionally, disclosures of the gross purchases, sales, issuances andsettlements activity in Level 3 of the fair value measurement hierarchy will berequired for fiscal years beginning after December 15, 2010.Elimination of Qualifying Special Purpose Entities(QSPEs) and Changes in the Consolidation Model for VIEsIn June 2009, the FASB issued SFAS No. 166, Accounting for Transfers ofFinancial Assets, an amendment of FASB Statement No. 140 (SFAS 166,now incorporated into ASC Topic 860) and SFAS No. 167, Amendmentsto FASB Interpretation No. 46(R) (SFAS 167, now incorporated into ASCTopic 810). Citigroup adopted both standards on January 1, 2010. Citigrouphas elected to apply SFAS 166 and SFAS 167 prospectively. Accordingly, priorperiods have not been restated.SFAS 166 eliminates the concept of QSPEs from U.S. GAAP and amendsthe guidance on accounting for transfers of financial assets. SFAS 167details three key changes to the consolidation model. First, former QSPEs169