Citigroup Inc.

are now included in the scope of SFAS 167. Second, the FASB has changedthe method of analyzing which party to a VIE should consolidate the VIE(known as the primary beneficiary) to a qualitative determination of whichparty to the VIE has “power,” combined with potentially significant benefitsor losses, instead of the previous quantitative risks and rewards model. Theparty that has “power” has the ability to direct the activities of the VIE thatmost significantly impact the VIE’s economic performance. Third, the newstandard requires that the primary beneficiary analysis be re-evaluatedwhenever circumstances change. The previous rules required reconsiderationof the primary beneficiary only when specified reconsiderationevents occurred.As a result of implementing these new accounting standards, Citigroupconsolidated certain of the VIEs and former QSPEs with which it currentlyhas involvement. Further, certain asset transfers, including transfers ofportions of assets, that would have been considered sales under SFAS 140, areconsidered secured borrowings under the new standards.In accordance with SFAS 167, Citigroup employed three approaches fornewly consolidating certain VIEs and former QSPEs as of January 1, 2010.The first approach requires initially measuring the assets, liabilities, andnoncontrolling interests of the VIEs and former QSPEs at their carryingvalues (the amounts at which the assets, liabilities, and noncontrollinginterests would have been carried in the Consolidated Financial Statements, ifCitigroup had always consolidated these VIEs and former QSPEs). The secondapproach measures assets at their unpaid principal amount, and is appliedwhen determining carrying values is not practicable. The third approach is toelect the fair value option, in which all of the financial assets and liabilitiesof certain designated VIEs and former QSPEs are recorded at fair value uponadoption of SFAS 167 and continue to be marked to market thereafter, withchanges in fair value reported in earnings.Citigroup consolidated all required VIEs and former QSPEs, as ofJanuary 1, 2010, at carrying values or unpaid principal amounts, except forcertain private label residential mortgage and mutual fund deferred salescommissions VIEs, for which the fair value option was elected. The followingtables present the impact of adopting these new accounting standardsapplying these approaches.The incremental impact of these changes on GAAP assets and resulting riskweightedassets for those VIEs and former QSPEs that were consolidated ordeconsolidated for accounting purposes as of January 1, 2010 was as follows:In billions of dollarsGAAPassetsIncrementalRiskweightedassets (1)Impact of consolidationCredit cards $ 86.3 $ 0.8Commercial paper conduits 28.3 13.0Student loans 13.6 3.7Private label Consumer mortgages 4.4 1.3Municipal tender option bonds 0.6 0.1Collateralized loan obligations 0.5 0.5Mutual fund deferred sales commissions 0.5 0.5Subtotal $134.2 $19.9Impact of deconsolidationCollateralized debt obligations (2) $ 1.9 $ 3.6Equity-linked notes (3) 1.2 0.5Total $137.3 $24.0(1) The net increase in risk-weighted assets (RWA) was $10 billion, principally reflecting the deductionfrom gross RWA of $13 billion of loan loss reserves (LLR) recognized from the adoption of SFAS166/167, which exceeded the 1.25% limitation on LLRs includable in Tier 2 Capital.(2) The implementation of SFAS 167 resulted in the deconsolidation of certain synthetic and cashcollateralized debt obligation (CDO) VIEs that were previously consolidated under the requirements ofASC 810 (FIN 46(R)). Due to the deconsolidation of these synthetic CDOs, Citigroup’s ConsolidatedBalance Sheet now reflects the recognition of current receivables and payables related to purchasedand written credit default swaps entered into with these VIEs, which had previously been eliminated inconsolidation. The deconsolidation of certain cash CDOs has a minimal impact on GAAP assets, butcauses a sizable increase in risk-weighted assets. The impact on risk-weighted assets results fromreplacing, in Citigroup’s trading account, largely investment grade securities owned by these VIEswhen consolidated, with Citigroup’s holdings of non-investment grade or unrated securities issued bythese VIEs when deconsolidated.(3) Certain equity-linked note client intermediation transactions that had previously been consolidatedunder the requirements of ASC 810 (FIN 46 (R)) because Citigroup had repurchased and held amajority of the notes issued by the VIE were deconsolidated with the implementation of SFAS 167,because Citigroup does not have the power to direct the activities of the VIE that most significantlyimpact the VIE’s economic performance. Upon deconsolidation, Citigroup’s Consolidated BalanceSheet reflects both the equity-linked notes issued by the VIEs and held by Citigroup as trading assets,as well as related trading liabilities in the form of prepaid equity derivatives. These trading assets andtrading liabilities were formerly eliminated in consolidation.170