Discover 2009 Annual Report Download - page 107

Short-term investments. Short-term investments include certificates of deposit with maturities greater than 90 days but
less than one year when purchased.
Investment Securities. Investment securities consist of certificated retained beneficial interests in Discover Card Execution
Note Trust (“DCENT”) issued in the form of Class B, Class C and Class D notes, certificated retained beneficial interests in
Discover Card Master Trust I (“DCMT”) issued in the form of Series CE and Series SD certificates, credit card asset-backed
securities issued by other institutions, asset-backed commercial paper notes of one issuer, U.S. Treasury obligations,
mortgage-backed securities issued by government and government-sponsored agencies and state agency bonds.
Investment securities which the Company has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are reported at amortized cost. All other investment securities are classified as available-for-sale, as
the Company does not hold investment securities for trading purposes. Available-for-sale investment securities are
reported at fair value with unrealized gains and losses, net of tax, reported as a component of accumulated other
comprehensive income included in stockholders’ equity. The Company estimates the fair value of available-for-sale
investment securities pursuant to the guidance in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”).
The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted for amortization of
premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest income. The
Company evaluates its unrealized loss positions for other-than-temporary impairment in accordance with GAAP
applicable for investments in debt and equity securities or for beneficial interests in securitized financial assets, as
applicable, and in accordance with SEC Staff Accounting Bulletin Topic 5M. Realized gains and losses and other-than-
temporary impairments related to investment securities are determined at the individual security level and are reported in
other income.
Loans Held for Sale. Loans held for sale include the amount of credit card receivables necessary to support net new
securitization transactions expected to take place in the next three months. Management believes its ability to reasonably
forecast the amount of existing credit card receivables that should be reclassified as held for sale is limited to three months
from the balance sheet date, as securitizations that occur beyond that point will involve a significant proportion of
receivables that have not yet been originated, due to customer repayment behavior and the revolving nature of credit
cards. In estimating the amount of credit card receivables that should be classified as held for sale, the Company
considers its ability to access the securitization market given current market conditions, scheduled maturities of
outstanding asset-backed securities, management’s targeted mix of funding sources used, and the relative availability of
the Company’s other funding sources.
The amount of credit card receivables classified as held for sale is determined on a homogeneous portfolio basis,
because the seller’s interest represents an undivided interest in each loan transferred to the securitization trust. The
Company includes its loans held for sale in loan receivables and carries these assets at the lower of aggregate cost or fair
value. The par value of loans classified as held for sale in the consolidated statements of financial condition approximates
their fair values as a result of the short-term nature of these assets. An allowance for loan losses does not apply to loans
held for sale.
When credit card receivables that are classified as held for sale are securitized and beneficial interests are issued to
third parties, loans held for sale is reduced, cash is received and amounts due from asset securitization is adjusted to
reflect changes in the Company’s retained interests as applicable. When certificated beneficial interests are retained,
loans held for sale is reduced and available-for-sale investment securities is increased.
The Company did not have any loans classified as held for sale at November 30, 2009 or 2008.
Loan Receivables. Loan receivables consist of credit card receivables and other consumer loans and include loans
classified as held for sale, if any, and loans classified as held for investment. Loans held for investment include credit card
and other consumer loans. Credit card receivables include consumer credit card receivables and business credit card
receivables. Other consumer loans consist of personal loans, student loans and mortgages. Credit card loan receivables
are reported at their principal amounts outstanding and include uncollected billed interest and fees. Other consumer loans
are reported at their principal amounts outstanding. Loan receivables also include unamortized net deferred loan
origination fees and costs (also see “ – Loan Interest and Fee Income”).
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