Charles Schwab 2015 Annual Report Download - page 85

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 65 -
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 obligations relating to guarantees are estimated based on transactions
for similar guarantees or expected present value measures.
Advertising and market development
Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as
client incentives and discounts. Such costs are generally expensed when incurred.
Income 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. Accrued interest relating to
unrecognized tax benefits is recorded in income tax expense and penalties are recorded in other expense.
Stock-based compensation
Stock-based compensation includes employee and board of director stock options, restricted stock units, and restricted stock
awards. 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. The excess tax benefits from
the exercise of stock options and the vesting of restricted stock awards are recorded in additional paid-in capital.
Fair values of assets and liabilities
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the
fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair
value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are
based on market pricing data obtained from sources independent of the Company. A quoted price in an active market
provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.
Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset
or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset
or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.
Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the
objectivity of the inputs as follows:
x Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that
the Company has the ability to access.
x Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets,
and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark
yields, issuer spreads, new issue data, and collateral performance.