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Significant Accounting Policies Effective Prior to the Adoption of FASB Statements No. 166 and 167
Loans Held for Sale. Prior to the adoption of FASB Statements No. 166 and 167, loans held for sale generally included
the amount of credit card receivables necessary to support net new securitization transactions expected to take place over the
subsequent three-month period. The amount of existing credit card receivables that would be reclassified as held for sale was
limited to three months from the balance sheet date, as securitizations that were to occur beyond that point involved a
significant proportion of receivables that had not yet been originated, due to customer repayment behavior and the revolving
nature of credit cards. In estimating the amount of credit card receivables that should be classified as held for sale, the
Company considered its ability to access the securitization market given current market conditions, scheduled maturities of
outstanding asset-backed securities, management's targeted mix of funding sources used, and the relative availability of the
Company's other funding sources.
The amount of credit card receivables classified as held for sale was determined on a homogeneous portfolio basis,
because the seller's interest represents an undivided interest in each loan transferred to the securitization trust. Credit card loan
receivables that were classified as held for sale were reported at their par value because management believed that
approximated their fair values as a result of the short-term nature of the assets. An allowance for loan losses does not apply to
loans held for sale.
When credit card receivables classified as held for sale were securitized and beneficial interests issued to third parties,
the loans held for sale balance was reduced, cash was received and amounts due from asset securitization was adjusted to
reflect changes in the Company's retained interests as applicable. When certificated beneficial interests were retained, loans
held for sale was reduced and the available-for-sale investment securities balance was increased.
Retained Interests in Securitized Assets. The Company periodically transfers credit card loan receivables to asset
securitization trusts. Securitized credit card loan receivables include outstanding principal, interest and fees. Prior to the
adoption of Statements No. 166 and 167, the Company's securitization transactions were recognized as sales and accordingly,
the Company removed securitized credit card receivables from loan receivables on its consolidated statements of financial
condition. The Company retained interests in the transferred financial assets in various forms including an undivided seller's
interest, certificated beneficial interests in the trust assets, accrued interest and fees on securitized credit card receivables
(“accrued interest receivable”), cash collateral accounts, servicing rights and rights to certain excess cash flows remaining after
payments to investors in the securitization trust of their contractual rate of return, the payment of servicing fees to the Company
and reimbursement of credit card losses (“interest-only strip receivable”).
The Company included its undivided seller's interest within loan receivables in the consolidated statements of financial
condition. The Company classified certificated retained beneficial interests as available-for-sale or held-to-maturity investment
securities on the consolidated statements of financial condition at their estimated fair values or amortized costs, respectively.
All other retained interests were recorded on the consolidated statements of financial condition in amounts due from asset
securitization. Certain components of amounts due from asset securitization were short-term in nature and, therefore, their
carrying values approximated fair values. The remaining retained interests in amounts due from asset securitization were
accounted for like trading securities and, accordingly, were marked to fair value each period with changes in their fair values
recorded in securitization income.
Cash flows associated with the securitization of credit card receivables that were originated for investment were included
in cash flows from investing activities. Cash flows related to credit card receivables transferred to the trust during the term of a
securitization in order to maintain a constant level of investor interest in receivables were classified as operating cash flows, as
those receivables were treated as being originated specifically for sale.
Securitization Income. When beneficial interests in securitized receivables were issued to third-party investors, the
Company recognized a gain on the transfer of the loan receivables. The amount of the gain depended in part on the previous
carrying amount of the assets involved in the transfer, allocated between the assets transferred and the retained interests based
upon their relative fair values at the date of the transfer. An interest-only strip receivable was recorded in the consolidated
statements of financial condition and represented the contractual right to receive interest and certain other revenue less certain
costs, including charge-offs on securitized loans and the interest paid to investors in the securitization transactions (“the excess
spread”) from the trust over the estimated life of the securitized loan receivables. The interest-only strip receivable was
recorded at its estimated fair value with subsequent changes in fair value recorded in securitization income. The Company
estimated the fair value of the interest-only strip receivable based on the present value of expected future cash flows using
management's best estimate of the key assumptions, including forecasted interest yield, loan losses and payment rates, the
interest rate paid to investors and a discount rate commensurate with the risks involved. The recognition of securitization
income from the actual net excess cash flows accrued was offset in part by the revaluation of the interest-only strip receivable
such that the interest-only strip receivable reflected only future excess cash flows. Also included in securitization income was
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