SEC Company Response from BANK OF AMERICA (BAC) — Feb 22, 2013
BANK OF AMERICA CORP /DE/ (BAC, BAC-PB, BAC-PE, BAC-PK, BAC-PL, BAC-PM, BAC-PN, BAC-PO, BAC-PP, BAC-PQ, BAC-PS, BML-PG, BML-PL) (CIK 0000070858)
Date: Feb. 22, 2013 · CIK: 0000070858 · Accession: 0000070858-13-000092
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-06523
Referenced dates: February 4, 2013, June 6, 2011, October 19, 2012
Letter
United States Securities and Exchange Commission Division of Corporation Finance Re: Bank of America Corporation Form 10-K for the Fiscal Year Ended December 31, 2011 Filed February 23, 2012 File No. 001-06523
Dear Ms. Hayes:
We have received and reviewed your letter dated February 4, 2013. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff's comments. Our responses are intended to address the comments and questions raised by the Staff. Terms used herein but not defined have the same meaning as in the referenced Form 10-K as applicable. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention.
Form 10-K for Fiscal Year Ended December 31, 2011
Management's Discussion and Analysis of Financial Condition and Results of Operations
Complex Accounting Estimates - Goodwill and Intangible Assets, page 124
1.
We note your response to the third bullet of prior comment 3 from our letter dated October 19, 2012. Please tell us in more detail how you considered the guidance in ASC 350-20-35-7 in determining that you were not required to specifically allocate those assets and liabilities to your reporting units.
Response: ASC 350-20-35-7 states, “In determining the carrying amount of a reporting unit, deferred income taxes shall be included in the carrying amount of the reporting unit, regardless of whether the fair value of the reporting unit will be determined assuming it would be bought or sold in a taxable or nontaxable transaction." As a result, our response to your comment is solely in regards to the approximate $30 billion of net deferred tax assets (“DTAs”) as of June 30, 2011 that have not been allocated to the reporting units.
Regarding the other remaining assets and liabilities in All Other, which composition is described in more detail in our response to the third bullet of prior comment 3 from your letter dated October 19, 2012 and, as we previously discussed with you, we performed a reconciliation of specific assets and liabilities that are assigned to All Other that are either not employed in the operations of a reporting unit or not considered in determining the fair value of the reporting units. We compared this total against the All Other assets and liabilities after the hypothetical allocations, which provided evidence that there were not any residual assets or liabilities in All Other that should have been allocated to the reporting units.
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
Page 2 of 7
As for the $30 billion of net DTAs noted in our response:
•
approximately $22 billion relates to net operating loss (“NOL”) and tax credit carryforwards,
•
approximately $26 billion relates to deferred tax assets (“DTAs”) resulting from temporary differences, and
•
approximately $18 billion relates to deferred tax liabilities (“DTLs”) resulting from temporary differences.
As a reference to the composition of the NOL and tax credit carryforwards, DTAs, and DTLs that existed at June 30, 2011, we have attached as an appendix a summary of our net deferred tax assets as of December 31, 2011 and we note that the December 31, 2011 balances are not significantly different than the amounts at June 30, 2011.
We do not believe the $22 billion of NOL and tax credit carryforwards that are attributed to specific legal entities are required to be or should be assigned to the reporting units because our reporting units are not separate legal entities. ASC 350-20 does not address whether deferred tax assets arising from NOL and tax credit carryforwards, which are not related to particular assets or liabilities of a reporting unit, should be assigned to a reporting unit. The NOL and tax credit carryforwards are applicable to certain legal entities whereas the DTAs and DTLs are applicable to particular assets and liabilities. Our segments and reporting units are not separate legal entities, but instead are particular assets and liabilities that are grouped based on the business activities they support. For example, every reporting unit will contain assets and liabilities that are owned by Bank of America, N.A. (BANA), our primary banking subsidiary, which results in the BANA legal entity being spread across the reporting units. Because our reporting units are not separate legal entities, we assume that a sale of a reporting unit would be in a taxable transaction and, as a result, we do not include a benefit from the NOL and tax credit carryforwards to the reporting units because a market participant acquirer would not be entitled to retain the NOL and tax credit carryforwards. Therefore, we do not believe the DTAs arising from the NOL and tax credit carryforwards that are attributable to specific legal entities are required to be or should be assigned to the reporting units.
For the remaining approximate $26 billion of DTAs and $18 billion of DTLs, it should be noted that $14 billion of the DTAs and $4 billion of the DTLs relate directly to our Consumer Real Estate Services (“CRES”) reporting unit which had no goodwill as of June 30, 2011.
The impact of allocating the remaining $12 billion of DTAs and $14 billion of DTLs would be immaterial to the impairment tests. In our July 1, 2011 response to comment 17 of your letter dated June 6, 2011, we discussed how we determine the carrying value of our reporting units. The most significant component of the carrying value is the determination of the amount of economic capital required for a segment and reporting unit. If we were to allocate the deferred taxes to the reporting units, we do not believe the deferred taxes would affect economic capital (or carrying value of the reporting units). Economic capital is based on market value volatility rather than generally accepted accounting principles. Hence, from an economic value perspective, the tax provisions are based on statutory income tax rates and use current taxes when computing net operating profit and for discounting to market value. As a result, the income tax timing differences are not relevant to market values and would not affect the economic capital of the reporting units. As described earlier, we assume the reporting units would be sold in a taxable transaction in which the acquirer would not receive any benefits from the deferred taxes; therefore, the deferred taxes do not change our fair value estimate. As a result, the reporting units' carrying values and fair values are not impacted by the allocation of deferred taxes, and therefore has no effect on step one of our goodwill impairment tests. We also considered an alternative view, which we do not support, where the deferred tax allocation would result in adjusting the reporting units' carrying values for the net amount of their applicable deferred tax allocations. In considering the allocation of the $12 billion of DTAs and $14 billion of DTLs, it is important to note that the majority of these DTAs and DTLs relate to assets and liabilities that are either spread across the reporting units or are not employed in the reporting units (i.e., they
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
Page 3 of 7
apply to All Other). As such, none of the reporting units' deferred taxes, on a net basis (e.g., DTAs less DTLs), is significant. Even if we applied this view, the allocation of the deferred taxes would not change the results of the June 30, 2011 goodwill impairment tests due to the insignificant net deferred taxes that would have been allocated. We do not support this view as it is primarily reliant on a separate legal entity concept. ASC 305-20 does not contemplate the effect an allocation of deferred taxes would have to a reporting unit's carrying value when that reporting unit is a group of assets and liabilities and not a separate legal entity or entities. As described above, the carrying value of our reporting units is based on the amount of economic capital required to support the reporting unit. The economic capital is determined on a current tax basis. Therefore, the allocation of the deferred taxes would also draw an intercompany receivable/payable or contribution/distribution from the parent so that the risk of the deferred taxes is borne by the parent and the capital basis would not be impacted for the effect of the deferred taxes (i.e., the amount of required capital is not affected by the deferred taxes).
2.
We note your response to the third bullet of prior comment 3 from our letter dated October 19, 2012 where you discuss the process you follow to allocate assets and liabilities to the reporting units. Tell us how you considered the fair values of the assets and liabilities allocated to each reporting unit during the hypothetical allocation process together with the fair values of the assets and liabilities you directly allocated to each of your reporting units in determining the fair value of each reporting unit as a whole. In other words, tell us how you ensure that the way you derive the fair value of your reporting units is reflective of all of the assets and liabilities that you have determined make up the carrying value of the reporting units. As part of your response, please address each of your fair value methodologies (market approach based on a weighting of tangible capital, book capital and earnings multiples, and income approach based on discounted cash flows of estimated future cash flows), separately.
Response: Prior to addressing your comment, we believe it would be helpful to provide a high-level summary of the allocation process of hypothetical assets and/or liabilities to our reporting units, which is described in more detail in our July 1, 2011 response to comment 17 of your letter dated June 6, 2011. Essentially, the process begins with the calculation of the amount of equity to allocate to a reporting unit. After the equity is determined, we total the amount of assets and liabilities specifically owned by the reporting units. This process results in the reporting units not having a balance sheet in which their assets equal their liabilities and equity. In order to get an appropriate balance sheet, hypothetical assets or liabilities are allocated to the reporting unit from the All Other category at their carrying value, which is viewed as an intercompany transaction and results in a balance sheet that is consistent with the reporting units' Allocated Equity and earnings.
An important consideration in this allocation is that the segments that support the reporting units are being assessed funding costs through the funds transfer pricing process. The funds transfer pricing process is designed and governed to ensure that each business, in conjunction with its actual interest income and interest expense, (herein interest income and interest expense is referred to as “cash flows”) is properly allocated applicable revenues and costs as if it were a standalone business. This process would also include the All Other category for its activities. The amount of cash flows assigned to the reporting unit is determined based on the reporting unit's owned assets and/or liabilities, including the duration of the reporting unit's assets and/or liabilities, and the amount of hypothetical assets or liabilities the entity needs to support those assets and liabilities and economic capital. Because of the method that costs are charged to the segments, it is imperative that the hypothetical asset or liability has duration and terms consistent with the costs being charged to the segment (i.e., the terms of the hypothetical asset or liability should be consistent with the costs of the hypothetical asset or liability). The cash flows and terms of the hypothetical assets and/or liabilities are those that we believe the segments would receive, incur, hold or owe if they operated on a standalone basis. If we tried to allocate specific assets and/or liabilities from All Other, they would still need to match the funding cost. Therefore, we would need to separate or split-up individual assets and liabilities, including the derivatives used in managing
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
Page 4 of 7
the Corporation's interest rate risk, into portions to get the assigned assets and/or liabilities to be consistent with the correct allocation. The use of a hypothetical allocation accomplishes this in a more efficient and effective manner and results in the reporting units having a proper balance sheet consisting of assets and liabilities that are consistent with the underlying equity and earnings. This process then allows us to rely on the reporting unit's cash flows when estimating fair value, which would incorporate the assets and liabilities, including the hypothetical assets and liabilities, that make up the reporting unit's carrying value.
In regards to our valuation methodologies, we rely on an income approach and/or a market approach to determine the fair value of our reporting units. In performing these valuations, the actual results of the reporting units, which is based on the actual cash flows associated with the assets and liabilities specific to the reporting units and the cash flows allocated through the funds transfer pricing process, which would be the cash flows associated with the hypothetical allocated assets and liabilities, are incorporated into the valuations. To assist with these fair value measurements for step one of the goodwill impairment tests, we engage a third party with expertise in valuations to help perform the valuations. Depending on the reporting unit, we may use the average of the two valuations, only the income approach or only the market approach for estimating the fair value of the reporting units. We use only the income approach for reporting units that are subject to certain volatility in the markets which, due in part to financial reform and regulation and the financial crisis, make market comparables less meaningful. We use only a market approach when we believe a market participant would be primarily concerned with the balance sheet composition of the reporting unit. Certain of these weightings have varied over the years due to the changing economic environment and changes in the composition of certain reporting units, to ensure they are evaluated in a meaningful way.
The method we apply to determine the carrying value of the reporting units is integral to our estimation of the fair value of the reporting units. The net earnings of the reporting units, which are derived from the reporting units' direct revenues, net interest income and costs and the interest income and expenses recognized through the funds transfer pricing process is a significant factor in the reporting units' fair value estimates. The costs associated with the funds transfer pricing process, are the costs of the hypothetical allocated assets and liabilities, and the resultant net earnings which are utilized in our income approach as it is based on a forecast of expected future net cash flows. These forecasted net cash flows include the reporting units' direct and allocated revenues and costs. Additionally, under the market approach, net earnings is also a significant factor in determining fair value as that approach considers multiples of the reporting unit's trailing 12 months of net income (or adjusted 12-month net income in circumstances where the trailing 12 months included significant one-time items), tangible Allocated Equity and Allocated Equity values with more emphasis placed on the earnings multiples. These net earnings are dependent on the direct and allocated revenues and costs. As descri
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CORRESP 1 filename1.htm BAC Response 02.04.13 February 22, 2013 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, NE Washington, DC 20549 Re: Bank of America Corporation Form 10-K for the Fiscal Year Ended December 31, 2011 Filed February 23, 2012 File No. 001-06523 Dear Ms. Hayes: We have received and reviewed your letter dated February 4, 2013. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff's comments. Our responses are intended to address the comments and questions raised by the Staff. Terms used herein but not defined have the same meaning as in the referenced Form 10-K as applicable. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention. Form 10-K for Fiscal Year Ended December 31, 2011 Management's Discussion and Analysis of Financial Condition and Results of Operations Complex Accounting Estimates - Goodwill and Intangible Assets, page 124 1. We note your response to the third bullet of prior comment 3 from our letter dated October 19, 2012. Please tell us in more detail how you considered the guidance in ASC 350-20-35-7 in determining that you were not required to specifically allocate those assets and liabilities to your reporting units. Response: ASC 350-20-35-7 states, “In determining the carrying amount of a reporting unit, deferred income taxes shall be included in the carrying amount of the reporting unit, regardless of whether the fair value of the reporting unit will be determined assuming it would be bought or sold in a taxable or nontaxable transaction." As a result, our response to your comment is solely in regards to the approximate $30 billion of net deferred tax assets (“DTAs”) as of June 30, 2011 that have not been allocated to the reporting units. Regarding the other remaining assets and liabilities in All Other, which composition is described in more detail in our response to the third bullet of prior comment 3 from your letter dated October 19, 2012 and, as we previously discussed with you, we performed a reconciliation of specific assets and liabilities that are assigned to All Other that are either not employed in the operations of a reporting unit or not considered in determining the fair value of the reporting units. We compared this total against the All Other assets and liabilities after the hypothetical allocations, which provided evidence that there were not any residual assets or liabilities in All Other that should have been allocated to the reporting units. Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Page 2 of 7 As for the $30 billion of net DTAs noted in our response: • approximately $22 billion relates to net operating loss (“NOL”) and tax credit carryforwards, • approximately $26 billion relates to deferred tax assets (“DTAs”) resulting from temporary differences, and • approximately $18 billion relates to deferred tax liabilities (“DTLs”) resulting from temporary differences. As a reference to the composition of the NOL and tax credit carryforwards, DTAs, and DTLs that existed at June 30, 2011, we have attached as an appendix a summary of our net deferred tax assets as of December 31, 2011 and we note that the December 31, 2011 balances are not significantly different than the amounts at June 30, 2011. We do not believe the $22 billion of NOL and tax credit carryforwards that are attributed to specific legal entities are required to be or should be assigned to the reporting units because our reporting units are not separate legal entities. ASC 350-20 does not address whether deferred tax assets arising from NOL and tax credit carryforwards, which are not related to particular assets or liabilities of a reporting unit, should be assigned to a reporting unit. The NOL and tax credit carryforwards are applicable to certain legal entities whereas the DTAs and DTLs are applicable to particular assets and liabilities. Our segments and reporting units are not separate legal entities, but instead are particular assets and liabilities that are grouped based on the business activities they support. For example, every reporting unit will contain assets and liabilities that are owned by Bank of America, N.A. (BANA), our primary banking subsidiary, which results in the BANA legal entity being spread across the reporting units. Because our reporting units are not separate legal entities, we assume that a sale of a reporting unit would be in a taxable transaction and, as a result, we do not include a benefit from the NOL and tax credit carryforwards to the reporting units because a market participant acquirer would not be entitled to retain the NOL and tax credit carryforwards. Therefore, we do not believe the DTAs arising from the NOL and tax credit carryforwards that are attributable to specific legal entities are required to be or should be assigned to the reporting units. For the remaining approximate $26 billion of DTAs and $18 billion of DTLs, it should be noted that $14 billion of the DTAs and $4 billion of the DTLs relate directly to our Consumer Real Estate Services (“CRES”) reporting unit which had no goodwill as of June 30, 2011. The impact of allocating the remaining $12 billion of DTAs and $14 billion of DTLs would be immaterial to the impairment tests. In our July 1, 2011 response to comment 17 of your letter dated June 6, 2011, we discussed how we determine the carrying value of our reporting units. The most significant component of the carrying value is the determination of the amount of economic capital required for a segment and reporting unit. If we were to allocate the deferred taxes to the reporting units, we do not believe the deferred taxes would affect economic capital (or carrying value of the reporting units). Economic capital is based on market value volatility rather than generally accepted accounting principles. Hence, from an economic value perspective, the tax provisions are based on statutory income tax rates and use current taxes when computing net operating profit and for discounting to market value. As a result, the income tax timing differences are not relevant to market values and would not affect the economic capital of the reporting units. As described earlier, we assume the reporting units would be sold in a taxable transaction in which the acquirer would not receive any benefits from the deferred taxes; therefore, the deferred taxes do not change our fair value estimate. As a result, the reporting units' carrying values and fair values are not impacted by the allocation of deferred taxes, and therefore has no effect on step one of our goodwill impairment tests. We also considered an alternative view, which we do not support, where the deferred tax allocation would result in adjusting the reporting units' carrying values for the net amount of their applicable deferred tax allocations. In considering the allocation of the $12 billion of DTAs and $14 billion of DTLs, it is important to note that the majority of these DTAs and DTLs relate to assets and liabilities that are either spread across the reporting units or are not employed in the reporting units (i.e., they Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Page 3 of 7 apply to All Other). As such, none of the reporting units' deferred taxes, on a net basis (e.g., DTAs less DTLs), is significant. Even if we applied this view, the allocation of the deferred taxes would not change the results of the June 30, 2011 goodwill impairment tests due to the insignificant net deferred taxes that would have been allocated. We do not support this view as it is primarily reliant on a separate legal entity concept. ASC 305-20 does not contemplate the effect an allocation of deferred taxes would have to a reporting unit's carrying value when that reporting unit is a group of assets and liabilities and not a separate legal entity or entities. As described above, the carrying value of our reporting units is based on the amount of economic capital required to support the reporting unit. The economic capital is determined on a current tax basis. Therefore, the allocation of the deferred taxes would also draw an intercompany receivable/payable or contribution/distribution from the parent so that the risk of the deferred taxes is borne by the parent and the capital basis would not be impacted for the effect of the deferred taxes (i.e., the amount of required capital is not affected by the deferred taxes). 2. We note your response to the third bullet of prior comment 3 from our letter dated October 19, 2012 where you discuss the process you follow to allocate assets and liabilities to the reporting units. Tell us how you considered the fair values of the assets and liabilities allocated to each reporting unit during the hypothetical allocation process together with the fair values of the assets and liabilities you directly allocated to each of your reporting units in determining the fair value of each reporting unit as a whole. In other words, tell us how you ensure that the way you derive the fair value of your reporting units is reflective of all of the assets and liabilities that you have determined make up the carrying value of the reporting units. As part of your response, please address each of your fair value methodologies (market approach based on a weighting of tangible capital, book capital and earnings multiples, and income approach based on discounted cash flows of estimated future cash flows), separately. Response: Prior to addressing your comment, we believe it would be helpful to provide a high-level summary of the allocation process of hypothetical assets and/or liabilities to our reporting units, which is described in more detail in our July 1, 2011 response to comment 17 of your letter dated June 6, 2011. Essentially, the process begins with the calculation of the amount of equity to allocate to a reporting unit. After the equity is determined, we total the amount of assets and liabilities specifically owned by the reporting units. This process results in the reporting units not having a balance sheet in which their assets equal their liabilities and equity. In order to get an appropriate balance sheet, hypothetical assets or liabilities are allocated to the reporting unit from the All Other category at their carrying value, which is viewed as an intercompany transaction and results in a balance sheet that is consistent with the reporting units' Allocated Equity and earnings. An important consideration in this allocation is that the segments that support the reporting units are being assessed funding costs through the funds transfer pricing process. The funds transfer pricing process is designed and governed to ensure that each business, in conjunction with its actual interest income and interest expense, (herein interest income and interest expense is referred to as “cash flows”) is properly allocated applicable revenues and costs as if it were a standalone business. This process would also include the All Other category for its activities. The amount of cash flows assigned to the reporting unit is determined based on the reporting unit's owned assets and/or liabilities, including the duration of the reporting unit's assets and/or liabilities, and the amount of hypothetical assets or liabilities the entity needs to support those assets and liabilities and economic capital. Because of the method that costs are charged to the segments, it is imperative that the hypothetical asset or liability has duration and terms consistent with the costs being charged to the segment (i.e., the terms of the hypothetical asset or liability should be consistent with the costs of the hypothetical asset or liability). The cash flows and terms of the hypothetical assets and/or liabilities are those that we believe the segments would receive, incur, hold or owe if they operated on a standalone basis. If we tried to allocate specific assets and/or liabilities from All Other, they would still need to match the funding cost. Therefore, we would need to separate or split-up individual assets and liabilities, including the derivatives used in managing Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Page 4 of 7 the Corporation's interest rate risk, into portions to get the assigned assets and/or liabilities to be consistent with the correct allocation. The use of a hypothetical allocation accomplishes this in a more efficient and effective manner and results in the reporting units having a proper balance sheet consisting of assets and liabilities that are consistent with the underlying equity and earnings. This process then allows us to rely on the reporting unit's cash flows when estimating fair value, which would incorporate the assets and liabilities, including the hypothetical assets and liabilities, that make up the reporting unit's carrying value. In regards to our valuation methodologies, we rely on an income approach and/or a market approach to determine the fair value of our reporting units. In performing these valuations, the actual results of the reporting units, which is based on the actual cash flows associated with the assets and liabilities specific to the reporting units and the cash flows allocated through the funds transfer pricing process, which would be the cash flows associated with the hypothetical allocated assets and liabilities, are incorporated into the valuations. To assist with these fair value measurements for step one of the goodwill impairment tests, we engage a third party with expertise in valuations to help perform the valuations. Depending on the reporting unit, we may use the average of the two valuations, only the income approach or only the market approach for estimating the fair value of the reporting units. We use only the income approach for reporting units that are subject to certain volatility in the markets which, due in part to financial reform and regulation and the financial crisis, make market comparables less meaningful. We use only a market approach when we believe a market participant would be primarily concerned with the balance sheet composition of the reporting unit. Certain of these weightings have varied over the years due to the changing economic environment and changes in the composition of certain reporting units, to ensure they are evaluated in a meaningful way. The method we apply to determine the carrying value of the reporting units is integral to our estimation of the fair value of the reporting units. The net earnings of the reporting units, which are derived from the reporting units' direct revenues, net interest income and costs and the interest income and expenses recognized through the funds transfer pricing process is a significant factor in the reporting units' fair value estimates. The costs associated with the funds transfer pricing process, are the costs of the hypothetical allocated assets and liabilities, and the resultant net earnings which are utilized in our income approach as it is based on a forecast of expected future net cash flows. These forecasted net cash flows include the reporting units' direct and allocated revenues and costs. Additionally, under the market approach, net earnings is also a significant factor in determining fair value as that approach considers multiples of the reporting unit's trailing 12 months of net income (or adjusted 12-month net income in circumstances where the trailing 12 months included significant one-time items), tangible Allocated Equity and Allocated Equity values with more emphasis placed on the earnings multiples. These net earnings are dependent on the direct and allocated revenues and costs. As descri