Discover 2009 Annual Report Download - page 111

recognition of securitization income from the actual net excess cash flows accrued is offset in part by the revaluation of
the interest-only strip receivable such that the interest-only strip receivable reflects only future excess cash flows. Also
included in securitization income is the annual servicing fee the Company receives based on a percentage of the investor
interest outstanding. 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. In addition, the
Company, in accordance with governing securitization documents, allocates portions of discount and interchange
revenue to all credit card securitization transactions, which is also recognized as securitization income. Securitization
transaction costs are deferred and amortized to securitization income over the life of the related transactions.
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, the Company’s results of operations will no longer reflect
securitization income, but will instead report interest income, provisions for loan losses and certain other income
associated with all managed loan receivables and interest expense associated with debt issued from the trusts to third-
party investors.
Loan Interest and Fee Income. Interest on loans is comprised largely of interest on credit card loans and is recognized
based upon the amount of loans outstanding and their contractual interest rate. Interest on credit card loans is included in
loan receivables when billed to the customer. The Company accrues unbilled interest revenue each month from a
customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans that
will revolve in the next cycle in the estimation of the accrued unbilled portion of interest revenue that is included in
accrued interest receivable on the consolidated statements of financial condition. The Company also applies the same
estimate in the valuation of the accrued interest on securitized loans that is included in amounts due from asset
securitization. Interest on other loan receivables is accrued monthly and recorded in accrued interest receivable in the
consolidated statements of financial condition.
The Company recognizes fees (except annual fees, balance transfer fees and certain product fees) on loan receivables
in earnings as the fees are assessed. Annual fees, balance transfer fees and certain product fees are recognized in
revenue ratably over the periods to which they relate. Loan fee income consists of fees on credit card loans and includes
annual, late, overlimit, returned check, cash advance and other miscellaneous fees and is reflected net of waivers and
charge-offs. Balance transfer fees are accreted to interest income over the life of the related balance. Pursuant to ASC
Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, direct loan origination costs on credit card loans
are deferred and amortized on a straight-line basis over a one-year period and recorded in interest income from credit
card loans. Direct loan origination costs on other loan receivables are deferred and amortized over the life of the loan
and recorded in interest income from other loans. As of November 30, 2009 and 2008, the remaining unamortized
deferred costs related to these items were $20.2 million and $25.2 million, respectively, and are recorded in loan
receivables.
The Company accrues interest and fees on loan receivables until the loans are paid or charged off, except in instances
of customer bankruptcy, death or fraud, where no further interest and fee accruals occur following notification. The
Company may, in connection with collection activities, place a loan on non-accrual status. When loan receivables are
charged off, unpaid accrued interest and fees are reversed against the income line items in which they were originally
recorded in the consolidated statements of income. The Company considers uncollectible interest and fee revenues in
assessing the adequacy of the allowance for loan losses.
Discount and Interchange Revenue. The Company earns discount revenue from fees charged to merchants with whom
the Company has entered into card acceptance agreements for processing credit card purchase transactions and acquirer
interchange revenue from merchant acquirers on all Discover Network card transactions made by credit card customers
at merchants with whom merchant acquirers have entered into card acceptance agreements for processing credit card
purchase transactions. Issuer interchange is a fee paid to the card-issuing entity as compensation for risk and other
operating costs. The Company pays issuer interchange to third-party card issuers that have entered into contractual
arrangements to issue cards on the Discover Network. This cost is contractually established and is based on the card-
issuing entity’s transaction volume. It is recorded at the time the credit card transaction is captured. The Company earns
discount revenue or acquirer interchange from these transactions, net of the issuer interchange cost paid to the card
issuing entity.
-99-