Discover 2009 Annual Report Download - page 112

Customer Rewards. The Company offers its customers various reward programs, including the Cashback Bonus reward
program, pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card
purchase amounts based on the type and volume of the customer’s purchases. The liability for customer rewards, which is
included in accrued expenses and other liabilities on the consolidated statements of financial condition, is estimated on an
individual customer basis and is accumulated as qualified customers make progress toward earning the reward through
their ongoing credit card purchase activity. In determining the appropriate liability for customer rewards, the Company
estimates forfeitures of rewards accumulated but not redeemed based on historical account closure and charge-off
experience, actual customer credit card purchase activity and the terms of the rewards program. In accordance with ASC
Subtopic 605-50, Revenue Recognition: Customer Payments and Incentives (“ASC 605-50”), the Company recognizes
customer rewards cost for both owned loans and securitized loans as a reduction of discount and interchange revenue.
For the years ended November 30, 2009, 2008 and 2007, rewards costs, adjusted for estimated forfeitures, amounted
to $669.5 million, $709.7 million and $721.9 million, respectively. At November 30, 2009 and 2008, the liability for
customer rewards, adjusted for estimated forfeitures, was $815.8 million and $777.9 million, respectively, which is
included in accrued expenses and other liabilities on the consolidated statement of financial condition.
Fee Products. The Company earns revenue related to fees received for marketing products ancillary to its credit card
and personal loans, including debt deferment/debt cancellation contracts and identity theft protection services to
customers. The amount of revenue recorded is based on the terms of the agreements and contracts with the third parties
that provide the services. The Company recognizes this income over the agreement or contract period as earned.
Transaction Processing Revenue. Transaction processing revenue represents fees charged to financial institutions and
merchants for processing ATM, debit and point-of-sale transactions over the PULSE Network, as well as various
participation and membership fees. Transaction processing revenue is recognized in the consolidated statements of
income at the time the transaction is processed. Amounts paid to financial institutions as incentives to enter into
contractual arrangements to route their ATM, debit and point-of-sale transactions through the PULSE Network, through
which the Company earns transaction processing revenue, are accounted for as an offset to this line item in accordance
with the guidance in ASC 605.
Stock-based Compensation. Pursuant to ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), the
Company measures the cost of employee services received in exchange for an award of stock-based compensation based
on the grant-date fair value of the award. The cost is recognized over the requisite service period, except for awards
granted to retirement-eligible employees, which are fully expensed by the grant date. No compensation cost is
recognized for awards that are subsequently forfeited.
Advertising Costs. The Company expenses advertising costs as incurred. Television advertising costs are expensed in
the period in which the advertising is first aired. Advertising costs are recorded in marketing and business development.
Income Taxes. Income tax expense is provided for using the asset and liability method, under which deferred tax assets
and liabilities are determined based on the temporary differences between the financial statement and income tax bases
of assets and liabilities using currently enacted tax rates. See Note 19: Income Taxes for more information about the
Company’s income taxes.
The Company’s taxable income was historically included in the consolidated U.S. federal income tax return of Morgan
Stanley and in returns filed by Morgan Stanley with certain state taxing jurisdictions. For periods prior to the Distribution,
the Company’s income tax liability has been computed and presented in these statements as if it were a separate
tax-paying entity. During such periods, federal and state taxes were remitted by the Company to Morgan Stanley
pursuant to a tax sharing agreement between the companies.
Financial Instruments Used for Asset and Liability Management. The Company enters into derivative financial
instruments, specifically interest rate swaps, to manage interest rate risk arising from interest-bearing deposits, and it
accounts for such transactions in accordance ASC Topic 815, Derivatives and Hedging. Derivative contracts having
positive net fair values, inclusive of net accrued interest receipts or payments, are recorded in other assets. Derivative
contracts with negative net fair values, inclusive of net accrued interest payments or receipts, are recorded in accrued
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