Charles Schwab 2015 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)
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1. Introduction and Basis of Presentation
CSC is a savings and loan holding company engaged, through its subsidiaries, in wealth management, securities brokerage,
banking, money management, custody, and financial advisory services. Schwab is a securities broker-dealer with over 325
domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England.
In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Schwab
Bank, a federal savings bank, and 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 ETFs™.
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 U.S., which require management to
make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain
estimates relate to OTTI of securities available for sale and securities held to maturity, valuation of goodwill, allowance for
loan losses, and legal and regulatory reserves. Actual results may differ from those estimates.
Principles of Consolidation
The Company accounts for investments in entities for which it owns a voting interest and for which it has the ability to
exercise significant influence over operating and financing decisions using the equity method of accounting. Investments in
entities for which the Company does not have the ability to exercise significant influence are generally carried at cost. Both
equity method and cost method investments are included in other assets.
The Company evaluates its initial and continuing involvement with certain entities to determine if the Company is required to
consolidate the entities under the variable interest entity (VIE) model. For interests in entities other than the Company’s
sponsored funds, the evaluation is based on a qualitative assessment of whether the Company is the primary beneficiary of
the VIE. The primary beneficiary of a VIE has the power to direct the activities of a VIE that most significantly impact the
VIE’s economic performance and the obligation to absorb losses of the VIE that potentially could be significant to the VIE or
the right to receive benefits from the VIE that potentially could be significant to the VIE.
The primary beneficiary determination for the Company’s sponsored funds is based on a quantitative assessment of whether
the Company would absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual
returns, or both. Based upon the Company’s assessments, the Company is not deemed to be the primary beneficiary of and,
therefore, is not required to consolidate any VIEs.
2. Summary of Significant Accounting Policies
Asset management and administration fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services
provided to individual and institutional clients, and are recognized as revenue over the period that the related service is
provided, based upon average asset balances. The Company’s policy is to recognize revenue subject to refunds because
management can estimate refunds based on Company specific experience. Actual refunds were not material as of
December 31, 2015. The Company earns mutual fund and ETF service fees for shareholder services, administration, and
investment management 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 and ETFs are based on quoted market prices and other observable market data. Other asset
management and administration fees include various asset-based fees, such as third-party mutual fund service fees, trust fees,
401(k) recordkeeping fees, and mutual fund clearing and other service fees.
In 2015, 2014 and 2013, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored
money market mutual funds. Under agreements with these funds entered into when the Company began waiving fees, the