Discover 2011 Annual Report Download - page 56

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K.
Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that
could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this
annual report on Form 10-K particularly under “Risk Factors” and “Special Note Regarding Forward-Looking Statements,”
which immediately follows “Risk Factors.” Unless otherwise specified, references to Notes to our consolidated financial
statements are to the Notes to our audited consolidated financial statements as of November 30, 2011 and 2010 and for the
three-year period ended November 30, 2011.
Introduction and Overview
Discover Financial Services is a direct banking and payment services company. Through our Discover Bank subsidiary,
we offer our customers credit cards, student loans, personal loans and deposit products. Through our DFS Services LLC
subsidiary and its subsidiaries, we operate 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. Our fiscal year ends on November 30 of each year.
Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, merchants
and issuers. The primary expenses required to operate our business include funding costs (interest expense), loan loss
provisions, customer rewards, and expenses incurred to grow, manage and service our loan receivables and networks. Our
business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of both
secured and unsecured debt.
Change in Accounting Principle Related to Off-Balance Sheet Securitizations
Beginning with the first quarter 2010, we have included the trusts used in our securitization activities in our consolidated
financial results in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140 (“Statement
No. 166”) (codified under the FASB Accounting Standards Codification (“ASC”) Section 860, Transfers and Servicing) and
Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretations No. 46(R) (“Statement No. 167”)
(codified under ASC Section 810, Consolidation), which were effective for us on December 1, 2009, the beginning of our 2010
fiscal year.
Under Statement No. 166, the trusts used in our securitization transactions are no longer exempt from consolidation.
Statement No. 167 prescribes an ongoing assessment of our involvement in the activities of the trusts and our rights or
obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether
those entities will be required to be consolidated in our financial statements. Based on our assessment, we concluded that we
are the primary beneficiary of the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust
(“DCENT”) (the “trusts”) and accordingly, we began consolidating the trusts on December 1, 2009. Using the carrying amounts
of the trust assets and liabilities as prescribed by Statement No. 167, we 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 an increase of $0.1 billion in accumulated other comprehensive income). The significant
adjustments to our statement of financial condition upon adoption of Statements No. 166 and 167 are outlined below:
• Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-
party investors;
• Reclassification of $4.6 billion of certificated retained interests classified as investment securities to loan
receivables;
• 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;
• Derecognition of the remaining $0.1 billion value of the interest-only strip receivable, net of tax, recorded in
amounts due from asset securitization and reclassification of the remaining $1.6 billion of amounts due from asset
securitization to restricted cash, loan receivables and other assets; 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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