Discover 2009 Annual Report Download - page 110

who are directly associated with the internal-use computer software project (to the extent those employees devoted time
directly to the project), and interest costs incurred when developing computer software for internal use are capitalized.
Amortization of capitalized costs begins when the software is ready for its intended use. Capitalized software is included
in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 7: Premises
and Equipment for further information about the Company’s premises and equipment.
Goodwill. Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds
the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill is not
amortized, but rather is subject to an impairment test at the reporting unit level each year, or more often if conditions
indicate impairment may have occurred, pursuant to ASC Topic 350, Intangibles – Goodwill and Other.
Intangible Assets. The Company’s other intangible assets consist of both amortizable and non-amortizable intangible
assets. The Company’s amortizable intangible assets consist primarily of acquired customer relationships and certain
trade name intangibles. All of the Company’s amortizable intangible assets are carried at net book value and are
amortized over their estimated useful lives. The amortization periods approximate the periods over which the Company
expects to generate future net cash inflows from the use of these assets. Accordingly, customer relationships are amortized
over a useful life of 15 years and trade names are amortized over a useful life of 25 years. The Company’s policy is to
amortize intangibles in a manner that reflects the pattern in which the projected net cash inflows to the Company are
expected to occur, where such pattern can be reasonably determined, as opposed to the straight-line basis. This method
of amortization typically results in a greater portion of the intangible asset being amortized in the earlier years of its
useful life.
All of the Company’s amortizable intangible assets, as well as other amortizable or depreciable long-lived assets such
as premises and equipment, are subject to impairment testing when events or conditions indicate that the carrying value
of an asset may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s
carrying value to the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset
over its remaining useful life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than
the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair value. The
estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows
expected to be derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the
remaining useful life of the asset will be evaluated to determine whether revision of the remaining amortization or
depreciation period is appropriate.
The Company’s nonamortizable intangible assets consist primarily of the international transaction processing rights
and brand-related intangibles included in the acquisition of Diners Club. These assets are deemed to have indefinite
useful lives and are therefore not subject to amortization. All of the Company’s nonamortizable intangible assets are
subject to a test for impairment annually, or more frequently if events or changes in circumstances indicate that the asset
might be impaired. As required by GAAP, if the carrying value of a nonamortizable intangible asset is in excess of its fair
value, the asset must be written down to its fair value through the recognition of an impairment charge to earnings. In
contrast to amortizable intangibles, there is no test for recoverability associated with the impairment test for
nonamortizable intangible assets.
Securitization Income. In accordance with GAAP in effect for the periods presented in the accompanying consolidated
financial statements, when beneficial interests in securitized receivables are issued to third-party investors, the Company
recognizes a gain on the transfer of the loan receivables. The amount of the gain depends in part on the previous
carrying amount of the assets involved in the transfer, allocated between the assets transferred and the retained interests
based upon their relative fair values at the date of the transfer. An interest-only strip receivable is recorded in the
consolidated statements of financial condition and represents the contractual right to receive interest and certain other
revenue less certain costs, including charge-offs on securitized loans and the interest paid to investors in the securitization
transactions (“the excess spread”) from the trust over the estimated life of the securitized loan receivables. The interest-
only strip receivable is recorded at its estimated fair value with subsequent changes in fair value recorded in securitization
income. The Company estimates the fair value of the interest-only strip receivable based on the present value of expected
future cash flows using management’s best estimate of the key assumptions, including forecasted interest yield, loan losses
and payment rates, the interest rate paid to investors and a discount rate commensurate with the risks involved. The
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