Discover 2009 Annual Report Download - page 109

and willingness to repay. Accounts meeting specific criteria are re-aged when the Company and the customer agree on a
temporary repayment schedule that may include concessionary terms. With re-aging, the outstanding balance of a
delinquent account is returned to a current status. Customers may also qualify for a workout re-age when either a longer
term or permanent hardship exists. The Company’s re-age practices are designed to comply with FFIEC guidelines.
Retained Interests in Securitized Assets. The Company periodically transfers credit card loan receivables to asset
securitization trusts. Securitized credit card loan receivables include outstanding principal, interest and fees. Through
November 30, 2009, the Company’s securitization transactions were recognized as sales under ASC 860; accordingly,
the Company removed securitized credit card receivables from loan receivables on its consolidated statements of financial
condition. The Company may retain interests in the transferred financial assets in various forms including an undivided
seller’s interest, certificated beneficial interests in the trust assets, accrued interest and fees on securitized credit card
receivables (“accrued interest receivable”), cash collateral accounts, servicing rights and rights to certain excess cash
flows remaining after payments to investors in the securitization trust of their contractual rate of return, the payment of
servicing fees to the Company and reimbursement of credit card losses (“interest-only strip receivables”).
The Company includes its undivided seller’s interest within loan receivables in the consolidated statements of financial
condition. A portion of the undivided seller’s interest is reclassified as loans held for sale to the extent that new
securitizations are expected to take place. Due to contractual requirements to hold minimum seller’s interest percentages
under the securitization agreements, only a portion of the Company’s undivided seller’s interest can be classified as held
for sale (also see Loans Held for Sale). The Company classifies certificated retained beneficial interests as
available-for-sale or held-to-maturity investment securities on the consolidated statements of financial condition at their
estimated fair values or amortized costs, respectively. All other retained interests are recorded on the consolidated
statements of financial condition in amounts due from asset securitization. Certain components of amounts due from asset
securitization are short-term in nature and, therefore, their carrying values approximate fair values. The remaining
retained interests in amounts due from asset securitization are accounted for like trading securities and, accordingly, are
marked to fair value each period with changes in their fair values recorded in securitization income. The Company does
not recognize servicing assets or servicing liabilities for servicing rights since the servicing fee approximates adequate
compensation to the Company for performing the servicing.
Cash flows associated with the securitization of credit card receivables that were originated for investment are included
in cash flows from investing activities. Cash flows related to credit card receivables transferred to the trust during the term
of a securitization in order to maintain a constant level of investor interest in receivables are classified as operating cash
flows, as those receivables are treated as being originated specifically for sale.
Beginning December 1, 2009, the Company will consolidate the securitization trusts pursuant to Statement No. 167
and, as a result, the securitization of credit card receivables using these trusts will thereafter be accounted for as secured
borrowings rather than sales. Beginning on that date, all of the Company’s retained interests in securitized assets will be
eliminated or reclassified, generally as loan receivables, accrued interest receivable or restricted cash, as appropriate.
Premises and Equipment, net. Premises and equipment, net are stated at cost less accumulated depreciation and
amortization, which is computed using the straight-line method over the estimated useful lives of the assets. Buildings are
depreciated over a period of 39 years. The costs of leasehold improvements are capitalized and depreciated over the
lesser of the remaining term of the lease or the asset’s estimated useful life, typically ten years. Furniture and fixtures are
depreciated over a period of five to ten years. Equipment is depreciated over three to ten years. Capitalized leases,
consisting of computers and processing equipment, are depreciated over three and six years, respectively. Maintenance
and repairs are immediately expensed, while the costs of improvements are capitalized.
Purchased software and capitalized costs related to internally developed software are amortized over their useful lives
of three to five years. Costs incurred during the application development stage related to internally developed software
are capitalized in accordance with ASC Subtopic 350-40, Intangibles – Goodwill and Other: Internal Use Software.
Pursuant to that guidance, costs are expensed as incurred during the preliminary project stage and post implementation
stage. Once the capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials and
services used in developing or obtaining internal-use computer software, payroll and payroll-related costs for employees
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