Discover 2011 Annual Report Download - page 104

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In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. This update is intended to clarify the FASB's views on the conditions under
which a loan modification should be deemed a troubled debt restructuring. The new guidance clarifies that a restructuring that
results in a delay in payment that is insignificant is not a concession, and, accordingly, it provides guidance on the
determination of when such a modification should be deemed insignificant. Our granting of student loan forbearance
constitutes a modification that results in a temporary delay in payments and generally involves no other changes of terms.
Under the new guidance, we have concluded that certain private student loans within our student loan portfolio for which we
have granted a second forbearance period, as well as personal loans to customers who are enrolled in a long-term payment
program, are troubled debt restructurings. This new accounting guidance was effective for the first interim or annual period
beginning after June 15, 2011, however it is required to be applied retrospectively to December 1, 2010, the beginning of our
2011 fiscal year. For the year ended November 30, 2011, this resulted in approximately $5.4 million of student loans and $7.6
million of personal loans being classified as troubled debt restructurings. The adoption of this ASU did not have a material
impact on the Company's allowance for loan losses.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses. ASU No. 2010-20 requires a greater level of disaggregation in disclosures relating to the credit
quality of the Company’s financing receivables and allowance for loan losses. ASU 2010-20 also requires enhanced disclosures
around nonaccrual and past due financing receivables and impaired loans. The Company has included the required disclosures
in Note 6: Loan Receivables.
2. Change in Accounting Principle
Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets-an amendment of
FASB Statement No. 140 (“Statement No. 166”, codified within ASC Topic 860, Transfers and Servicing) and Statement of
Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“Statement No. 167”, codified within
ASC Topic 810, Consolidation) became effective for the Company on December 1, 2009.
Statement No. 166 amended the accounting for transfers of financial assets. Under Statement No. 166, the trusts used in
the Company's securitization transactions are no longer exempt from consolidation. Statement No. 167 prescribes an ongoing
assessment of the Company's involvement in the activities of the trusts and the Company's rights or obligations to receive
benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those variable interest
entities (“VIEs”) must be consolidated in the Company's financial statements. In accordance with Statement No. 167, the
Company concluded it is the primary beneficiary of the Discover Card Master Trust I (“DCMT”) and the Discover Card
Execution Note Trust (“DCENT”) and accordingly, the Company began consolidating the trusts on December 1, 2009. Using
the carrying amounts of the trust assets and liabilities as prescribed by Statement No. 167, the Company recorded a $21.1
billion increase in total assets, a $22.4 billion increase in total liabilities and a $1.3 billion decrease in stockholders' equity
(comprised of a $1.4 billion decrease in retained earnings offset by a $0.1 billion increase in accumulated other comprehensive
income). These amounts were comprised of the following transition adjustments, which were treated as noncash activities for
purposes of preparing the 2010 consolidated statement of cash flows:
• Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-
party investors;
• Consolidation of $0.1 billion of cash collateral accounts and the associated debt issued from the trusts;
• Reclassification of $2.3 billion of held-to-maturity investment securities to loan receivables;
• Reclassification of $2.3 billion of available-for-sale investment securities to loan receivables and reversal of $0.1
billion, net of tax, of related unrealized losses previously recorded in other comprehensive income;
• Recording of a $2.1 billion allowance for loan losses, not previously required under GAAP, for the newly
consolidated and reclassified credit card loan receivables;
• Reversal of all amounts recorded in amounts due from asset securitization through (i) derecognition of the
remaining $0.1 billion value of the interest-only strip receivable, net of tax, (ii) reclassification of $0.8 billion of
cash collateral accounts and $0.3 billion of accumulated collections to restricted cash, (iii) reclassification of $0.2
billion to unbilled accrued interest receivable, and (iv) reclassification of $0.3 billion of billed accrued interest
receivable to loan receivables; and
• Recording of net deferred tax assets of $0.8 billion, largely related to establishing an allowance for loan losses on
the newly consolidated and reclassified credit card loan receivables.
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