Discover 2011 Annual Report Download - page 102

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Notes to the Consolidated Financial Statements
1. Background and Basis of Presentation
Description of Business. Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment
services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a
financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and
examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Through its Discover Bank
subsidiary, a Delaware state-chartered bank, the Company offers its customers credit cards, student loans, personal loans and
deposit products. Through its DFS Services LLC subsidiary and its subsidiaries, the Company operates the Discover Network,
the PULSE Network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network is a payment card
transaction processing network for Discover card-branded and third-party issued credit, debit and prepaid cards. PULSE
operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with
access to ATMs domestically and internationally, as well as point of sale terminals at retail locations throughout the U.S. for
debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that
issue Diners Club branded credit cards and/or provide card acceptance services.
The Company’s business segments are Direct Banking and Payment Services. The Direct Banking segment includes
consumer banking and lending products which includes Discover card-branded credit cards issued to individuals and small
businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid
cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary. The Payment
Services segment includes PULSE, Diners Club and the Company’s third-party issuing business, which includes credit, debit
and prepaid cards issued on the Discover Network by third parties.
Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity
with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related disclosures. These estimates are based on information available as of the date of the
consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated financial
statements are reasonable. Actual results could differ from these estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiaries. The Company's policy is to consolidate all entities in which it owns more than 50% of the outstanding
voting stock unless it does not control the entity. However, the Company did not have a controlling voting interest in any entity
other than its wholly-owned subsidiaries in the periods presented in the accompanying consolidated financial statements.
It is also the Company's policy to consolidate any variable interest entity for which the Company is the primary
beneficiary, as defined by GAAP. Pursuant to amendments to GAAP that became effective for the Company on December 1,
2009, the Company concluded that it is the primary beneficiary of the Discover Card Master Trust I and the Discover Card
Execution Note Trust (the “trusts”), and accordingly, began consolidating the trusts. The Company is deemed to be the primary
beneficiary of each of these trusts since it is, for each, the trust servicer and the holder of both the residual interest and the
majority of the most subordinated interests. Because of those involvements, the Company has, for each trust, i) the power to
direct the activities that most significantly impact the economic performance of the trust, and ii) the obligation (or right) to
absorb losses (or receive benefits) of the trust that could potentially be significant. See Note 2: Change in Accounting Principle
for additional information. Each of those entities did not meet the conditions for consolidation under GAAP standards in effect
through November 30, 2009, as each was a qualified special purpose entity through that date and therefore exempt from the
variable interest entity consolidation rules in effect prior to December 1, 2009. In conjunction with the acquisition of The
Student Loan Corporation on December 31, 2010, the Company determined that it is the primary beneficiary of the student loan
trusts included among the acquired assets. The Company has determined that it was not the primary beneficiary of any other
variable interest entity during the years ended November 30, 2011 and 2010 and that it was not the primary beneficiary of any
variable interest entity during the year ended November 30, 2009 under the consolidation rules in effect during that period.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the
Company has significant influence over operating and financial decisions, the Company applies the equity method of
accounting. In cases where the Company's equity investment is less than 20% and significant influence does not exist, such
investments are carried at cost.
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