Discover 2009 Annual Report Download - page 105

of any variable interest entity under the consolidation rules which applied in the periods presented in the accompanying
consolidated financial statements. For investments in any entities in which the Company owns 50% or less of the
outstanding voting stock but in which the Company has significant influence over operating and financial decisions, the
Company applies the equity method of accounting. In cases where the Company’s investment is less than 20% and
significant influence does not exist, such investments are carried at cost.
Pursuant to recent amendments to GAAP rules for consolidation which go into effect for the Company on December 1,
2009, but which may not be applied prior to that date, the Company has concluded that it is the primary beneficiary of
the Discover Card Master Trust I and the Discover Card Execution Note Trust (the “trusts”). Accordingly, beginning on
December 1, 2009, the Company will consolidate the trusts. Each of those entities did not meet the conditions for
consolidation under GAAP standards in effect through November 30, 2009. See “ – Recently Issued Accounting
Pronouncements” below for more detail.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards
No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles –
a replacement of FASB Statement No. 162 (“Statement No. 168”). This Statement establishes the FASB Accounting
Standards Codification (the “Codification” or “ASC”) as the single source of authoritative GAAP. All previous GAAP
standards have been superseded by the Codification. Rules and interpretive releases of the U.S. Securities and Exchange
Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants, and the Codification neither replaces nor affects that guidance. Statement No. 168 is effective for interim and
annual financial statements issued for periods ending after September 15, 2009, and references to GAAP in this report
have been updated as a result. Subsequent changes to GAAP will be incorporated into the Codification through the
issuance of Accounting Standards Updates (“ASU”) rather than FASB Statements, Staff Positions, Interpretations or
Emerging Issues Task Force (“EITF”) Abstracts. The adoption of Statement No. 168 did not impact the Company’s
financial condition, results of operations or cash flows.
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting
Standards No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140 (“Statement
No. 166”) and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R)
(“Statement No. 167”). In December 2009, Statement No. 166 was codified within the Codification under Section 860,
Transfers and Servicing, and Statement No. 167 was codified within Section 810, Consolidation. For ease of reference,
and to clarify between guidance applicable as of the date of the accompanying financial statements and guidance
applicable to future periods, such guidance will be referred to as Statements No. 166 and 167 within this document.
Statement No. 166 amends the accounting for transfers of financial assets and will impact the accounting for the
Company’s credit card asset securitization activities. Under Statement No. 166, the trusts used in the Company’s
securitization transactions will no longer be exempt from consolidation. Statement No. 167 prescribes an ongoing
assessment of the Company’s involvement in the activities of the trusts and the Company’s rights or obligations to receive
benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those entities will
be required to be consolidated in the Company’s financial statements. The assessment under Statement No. 167, which is
effective for the Company on December 1, 2009, will result in the consolidation of the trusts by the Company as of that
date, which will have a material impact on the Company’s reported financial condition. Using the carrying amounts of the
trust assets and liabilities as prescribed by Statement No. 167, the Company expects to record a $21.1 billion increase in
total assets, a $22.4 billion increase in total liabilities and a $1.3 billion decrease in stockholders’ equity (comprised of a
$1.4 billion decrease in retained earnings offset by a $0.1 billion increase in other comprehensive income). Included in
these amounts will be the following adjustments:
• Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-
party investors;
• Consolidation of $0.1 billion of cash collateral accounts and the associated debt issued from the trusts;
• Reclassification of $2.3 billion of held-to-maturity investment securities to loan receivables;
• Reclassification of $2.3 billion of available-for-sale investment securities to loan receivables and reversal of $0.1
billion, net of tax, of related unrealized losses previously recorded in other comprehensive income;
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