Charles Schwab 2011 Annual Report Download - page 80

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 52 -
1. Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities
brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with
over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London,
U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles
Schwab Bank (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the
investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds®, and for Schwab’s
exchange-traded funds, which are referred to as the Schwab ETFsTM.
The accompanying consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred
to as the Company). Intercompany balances and transactions have been eliminated. These consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States, which require
management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial
statements. Certain estimates relate to other-than-temporary impairment of securities available for sale and securities held to
maturity, valuation of goodwill, allowance for loan losses, and legal reserves. Actual results may differ from those estimates.
Certain prior-period amounts have been reclassified to conform to the current period presentation.
2. Summary of Significant Accounting Policies
Asset management and administration fees, which include mutual fund service fees and fees for other asset-based financial
services provided to individual and institutional clients, are recognized as revenue over the period that the related service is
provided, based upon average asset balances. The Company earns mutual fund service fees for shareholder services,
administration, investment management services, and transfer agent services (through July 2009) provided to its proprietary
funds, and recordkeeping and shareholder services provided to third-party funds. These fees are based upon the daily balances
of client assets invested in these funds. The Company also earns asset management fees for advice solutions, which include
advisory and managed account services that are based on the daily balances of client assets subject to the specific fee for
service. The fair values of client assets included in proprietary and third-party mutual funds are based on quoted market prices
and other observable market data. Other asset management and administration fees include various asset based fees, such as
trust fees, 401k record keeping fees, and mutual fund clearing and other fees.
In 2011, 2010 and 2009, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored
money market mutual funds in order to provide a positive return to clients. Under agreements with these funds, the Company
may recover such fee waivers depending on the future performance of the funds and approval by the boards of the respective
funds until the third anniversary of the end of the fiscal year in which such fee waiver occurs, subject to certain limitations.
Recoveries of previously-waived asset management fees are recognized as revenue when substantially all uncertainties about
timing and amount of realization are resolved. Amounts recognized in revenue for recoveries of previously-waived asset
management fees were not material in 2011, 2010 or 2009.
Interest revenue represents interest earned on certain assets, which include cash and cash equivalents, cash and investments
segregated, receivables from brokers, dealers, and clearing organizations, receivables from brokerage clients, other securities
owned, securities available for sale, securities held to maturity, loans to banking clients, and loans held for sale. Interest
revenue is recognized in the period earned based upon average or daily asset balances and respective interest rates.
Securities transactions: Trading revenue includes commission and principal transaction revenues. Clients’ securities
transactions are recorded on the date that they settle, while the related commission revenues and expenses are recorded on the
date that the trade occurs. Principal transaction revenues are primarily comprised of revenues from client fixed income
securities trading activity, which are recorded on a trade date basis.
Cash and cash equivalents: The Company considers all highly liquid investments with original maturities of three months or
less that are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include