Charles Schwab 2010 Annual Report Download - page 72

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
straight-line basis over an estimated useful life of three to ten years. Buildings are depreciated on a straight-line basis over 20 to 40
years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the
term of the lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a
straight-line basis over an estimated useful life of three or five years. Equipment, office facilities, and property are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired.
Goodwill associated with acquisitions prior to January 1, 2009, represented the cost of the acquired business in excess of the fair
value of the individually identified net asset acquired. Goodwill is not amortized but is tested for impairment annually or whenever
indications of impairment exist. In testing for a potential impairment of goodwill, management estimates the fair value of each of the
Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly
by management), and compares it to their carrying value. If the estimated fair value of a reporting unit is less than its carrying value,
management is required to estimate the fair value of all assets and liabilities of the reporting unit, including goodwill. If the carrying
value of the reporting unit’s goodwill is greater than the estimated fair value, an impairment charge is recognized for the excess. The
Company’s annual impairment testing date is April 1 . The Company did not recognize any goodwill impairment in 2010, 2009, or
2008.
D
erivative financial instruments are recorded on the balance sheet in other assets and other liabilities at fair value. Schwab Bank’s
loans held for sale portfolio includes fixed-rate residential first-mortgages, which are subject to losses in value when market interest
rates rise. Schwab Bank uses forward sale commitments to manage this risk. These forward sale commitments have been designated
as cash flow hedging instruments with respect to the loans held for sale. Accordingly, the fair values of these forward sale
commitments are recorded on the Company’s consolidated balance sheet, with gains or losses recorded in other comprehensive
income until the associated loan is sold.
Additionally, Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that
will be held for sale. Schwab Bank considers the fair value of these commitments to be zero at the commitment date, with subsequent
changes in fair value determined solely based on changes in market interest rates. Any changes in fair value of the interest rate lock
commitments are completely offset by changes in fair value of the related forward sale commitments.
Guarantees and indemnifications: The Company recognizes, at the inception of a guarantee, a liability equal to the estimated fair
value of the obligation undertaken in issuing the guarantee. The fair values of the obligations relating to standby letter of credit
agreements (LOCs) are estimated based on fees charged to enter into similar agreements, considering the creditworthiness of the
counterparties. The fair values of the obligations relating to other guarantees are estimated based on transactions for similar
guarantees or expected present value measures.
I
ncome taxes: The Company provides for income taxes on all transactions that have been recognized in the consolidated financial
statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled
or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income
tax laws, are recorded in earnings in the period during which such changes are enacted. The Company’s unrecognized tax benefits,
which are included in accrued expenses and other liabilities, represent the difference between positions taken on tax return filings and
estimated potential tax settlement outcomes.
Stock-based compensation: Stock-based compensation includes employee and board of director stock options, restricted stock awards,
and restricted stock units. The Company measures compensation expense for these share-based payment arrangements based on their
estimated fair values as of the awards’ grant date. The fair value of the share-based award is recognized over the vesting period as
stock-based compensation.
Stock-based compensation expense is based on awards expected to vest and therefore is reduced for estimated forfeitures. Forfeitures
are estimated at the time of grant based on the Company’s historical forfeiture experience and revised in subsequent periods if actual
forfeitures differ from those estimates.
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