Discover 2011 Annual Report Download - page 105

93
The assets of the consolidated VIEs include restricted cash and certain credit card loan receivables, which are restricted
to settle the obligations of those entities and are not expected to be available to the Company or its creditors. Liabilities of the
consolidated VIEs include secured borrowings for which creditors or beneficial interest holders do not have recourse to the
general credit of the Company.
Beginning with the Company's statements of income for the year ended November 30, 2010, the Company no longer
reports securitization income, but instead reports interest income, net charge-offs and certain other income associated with all
securitized loan receivables, and interest expense associated with debt issued from the trusts to third-party investors in the same
line items in the Company's statement of income as non-securitized credit card loan receivables and corporate debt.
Additionally, the Company no longer records initial gains on new securitization activity since securitized credit card loans no
longer receive sale accounting treatment. Also, there are no gains or losses recorded on the revaluation of the interest-only strip
receivable as that asset is not recognizable in a transaction accounted for as a secured borrowing. Because the Company's
securitization transactions are accounted for under the new accounting rules as secured borrowings rather than asset sales, the
cash flows from securitization transactions are presented as cash flows from financing activities rather than as cash flows from
operating or investing activities.
The Company's statement of income for the year ended November 30, 2009 has not been retrospectively adjusted to
reflect the amendments to ASC 810 and ASC 860. Therefore, 2011 and 2010 results will not be comparable to prior period
amounts.
3. Summary of Significant Accounting Policies
Cash and Cash Equivalents. Cash and cash equivalents is defined by the Company as cash on deposit with banks,
including time deposits and other highly liquid investments, with maturities of 90 days or less when purchased. Cash and cash
equivalents included $0.6 billion and $0.4 billion of cash and due from banks and $2.2 billion and $4.7 billion of interest-
earning deposits in other banks at November 30, 2011 and 2010, respectively.
Restricted Cash. Restricted cash includes cash for which the Company's ability to withdraw funds at any time is
contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or other
obligations.
Short-term Investments. Short-term investments include certificates of deposit with maturities greater than 90 days but
less than one year when purchased.
Investment Securities. At November 30, 2011, investment securities consisted of credit card asset-backed securities
issued by other institutions, U.S. Treasury and U.S. government agency obligations, corporate debt securities, mortgage-backed
securities issued by government agencies and state agency bonds. Investment securities which the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. All other investment
securities are classified as available-for-sale, as the Company does not hold investment securities for trading purposes.
Available-for-sale investment securities are reported at fair value with unrealized gains and losses, net of tax, reported as a
component of accumulated other comprehensive income included in stockholders' equity. The Company estimates the fair value
of available-for-sale investment securities pursuant to the guidance in ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”). The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted
for amortization of premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest
income. The Company evaluates its unrealized loss positions for other-than-temporary impairment in accordance with GAAP
applicable for investments in debt and equity securities and in accordance with SEC Staff Accounting Bulletin Topic 5M.
Realized gains and losses and other-than-temporary impairments related to investment securities are determined at the
individual security level and are reported in other income.
To-be-announced Investment Securities. The Company’s to-be-announced investment securities are forward contracts for
regular-way purchases of government agency securities. They are accounted for as investment securities rather than as
derivative instruments. Accordingly, they are designated as held-to-maturity or available-for-sale consistent with the expected
designation of the security to be purchased. These contracts are for the purchase of mortgage-backed securities with a stated
coupon and original term to maturity but for which the specific underlying mortgage loans are not known at the time of the
transaction. The related liability associated with these contracts is recorded in other liabilities within the consolidated statement
of financial condition.
Loans Held for Sale. When management makes a decision to sell loan receivables, loans will be reclassified as held for
sale. The Company includes its loans held for sale in loan receivables and carries these assets at the lower of aggregate cost or
fair value. In determining fair value, management considers the expected sale price, which is based on market analysis. An
allowance for loan losses is not maintained for loans held for sale.
Table of Contents