Discover 2009 Annual Report Download - page 106

• Recording of a $2.1 billion allowance for loan losses, not previously required under GAAP,for the newly
consolidated and reclassified credit card loan receivables;
• Reversal of all amounts recorded in amounts due from asset securitization through (i) derecognition of the remaining
$0.1 billion value of the interest-only strip receivable, net of tax, (ii) reclassification of $0.8 billion of cash collateral
accounts and $0.3 billion of accumulated collections to restricted cash, (iii) reclassification of $0.2 billion to unbilled
accrued interest receivable, and (iv) reclassification of $0.3 billion of billed accrued interest receivable to loan
receivables; and
• Recording of net deferred tax assets of $0.8 billion, largely related to establishing an allowance for loan losses on
the newly consolidated and reclassified credit card loan receivables.
After adoption, the Company’s results of operations will no longer reflect securitization income, but will instead report
interest income, net charge-offs and certain other income associated with all securitized loan receivables and interest
expense associated with debt issued from the trusts to third-party investors in the same line items in the Company’s results
of operations as non-securitized credit card loan receivables and corporate debt. Additionally, after adoption, the
Company will no longer record initial gains on new securitization activity since securitized credit card loans will no longer
receive sale accounting treatment. Further, the Company will not record any gains or losses on the revaluation of the
interest-only strip receivable as that asset is not recognizable in a transaction accounted for as a secured borrowing.
Because the Company’s securitization transactions will be accounted for under the new accounting rules as secured
borrowings rather than asset sales, the cash flows from these transactions will be presented as cash flows from financing
activities rather than cash flows from operating or investing activities. Prior to the issuance of Statements No. 166 and
167, the FASB issued guidance to require additional information related to securitization activities to be disclosed in
advance of the effective date of Statements No. 166 and 167. These disclosures are contained in Note 6: Credit Card
Securitization Activities.
In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. This standard provides guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. Required disclosures include a description of how investment
allocation decisions are made, the inputs and valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk. The FSP is effective for fiscal years ending after December 15, 2009. The application of
this guidance will only affect disclosures and therefore will not impact the Company’s financial condition, results of
operations or cash flows. This new disclosure guidance has been codified within ASC Topic 715, Compensation –
Retirement Benefits.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities, which addresses whether unvested equity-based awards
are participating securities and, therefore, need to be included in the earnings allocation in computing earnings per share
under the two-class method described in FASB Statement No. 128, Earnings per Share. This guidance is effective for the
Company beginning December 1, 2009 and cannot be adopted early. All prior period earnings per share data
presented in financial statements that are issued after the effective date must be adjusted retrospectively to conform to the
new guidance. Other than the measurement of earnings per share, the adoption of this standard will not impact the
Company’s financial condition, results of operations or cash flows. This new accounting guidance has been codified
within ASC Topic 260, Earnings per Share.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents. Cash and due from banks is defined by the Company as cash on hand and on deposit
with banks, including time deposits and other highly liquid investments with maturities of 90 days or less when purchased.
Cash and cash equivalents included $0.5 billion and $0.8 billion of cash and due from banks, $0 and $1.1 billion of
Federal Funds sold, and $12.5 billion and $8.3 billion of interest-earning deposits in other banks at November 30, 2009
and 2008, respectively.
Restricted Cash. Restricted cash includes cash whereby the Company’s ability to withdraw funds at any time is
contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or
other obligations.
-94-