Discover 2011 Annual Report Download - page 109

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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 and were
$150.1 million, $143.6 million and $93.0 million for the years ended November 30, 2011, 2010 and 2009, respectively.
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 17: Income Taxes for more information about the Company's
income taxes.
Financial Instruments Used for Asset and Liability Management. The Company enters into derivative financial
instrument contracts, specifically interest rate swaps, to manage interest rate risk arising from certain interest-rate sensitive
assets and liabilities, 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 expenses and other liabilities. With regard to such derivatives hedging interest-bearing deposits or long-term debt,
changes in both the fair value of the derivatives and the gains or losses on the hedged interest-bearing deposits or long-term
debt relating to the risk being hedged are recorded in interest expense and provide offset to one another. Ineffectiveness related
to these fair value hedges, if any, is recorded in interest expense. With regard to derivatives hedging future cash flows resulting
from credit card loan receivables attributable to changes in benchmark interest rates, changes in the fair value of the derivatives
are recorded in other comprehensive income and are subsequently reclassified into interest income in the period that the hedged
forecasted transaction affects earnings. Ineffectiveness related to these cash flow hedges, if any, is recorded in other income.
Accumulated Other Comprehensive Income. In accordance with the requirements of ASC Topic 220, Comprehensive
Income, the Company records unrealized gains and losses on available-for-sale securities, certain pension adjustments and
changes in the fair value of cash flow hedges in accumulated other comprehensive income on an after tax basis where
applicable. The Company presents accumulated other comprehensive income, net of tax, in its consolidated statements of
changes in stockholders' equity.
Significant Revenue Recognition Accounting Policies
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. Interest on other consumer loan receivables is accrued monthly in accordance
with their contractual terms and recorded in accrued interest receivable, which is included in other assets, in the consolidated
statements of financial condition. Interest related to purchased credit-impaired loans is discussed in Note 6: Loan Receivables.
The Company recognizes fees (except annual fees, balance transfer fees and certain product fees) on loan receivables in
interest income or loan fee income as the fees are assessed. Annual fees, balance transfer fees and certain product fees are
recognized in interest income or loan fee income ratably over the periods to which they relate. Balance transfer fees are
accreted to interest income over the life of the related balance. As of November 30, 2011 and 2010, deferred revenues related to
balance transfer fees, recorded as a reduction of loan receivables, were $40.9 million and $43.9 million, respectively. Loan fee
income consists of fees on credit card loans and includes annual, late, returned check, cash advance and other miscellaneous
fees and is reflected net of waivers and charge-offs. Subsequent to February 2010, the Company ceased charging overlimit fees
on Discover credit cards.
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, 2011 and 2010, the remaining unamortized deferred costs
related to loan origination were $22.9 million and $12.5 million, respectively, and were 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. Payments received
on nonaccrual loans are allocated according to the same payment hierarchy methodology applied to loans that are accruing
interest. 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. Charge-offs and recoveries of amounts which
relate to capitalized interest on student loans are treated as principal charge-offs and recoveries, affecting the allowance for loan
losses rather than interest income. The Company considers uncollectible interest and fee revenues in assessing the adequacy of
the allowance for loan losses.
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