Discover 2011 Annual Report Download - page 57

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Beginning with the first quarter 2010, our results of operations no longer reflect securitization income, but instead report
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 our results of operations as non-
securitized credit card loan receivables and corporate debt. Additionally, we no longer record initial gains on new securitization
activity since securitized credit card loans no longer receive sale accounting treatment. Also, there are no gains or losses 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 our securitization transactions are being accounted for under the new accounting rules as secured
borrowings rather than asset sales, the cash flows from these transactions are presented as cash flows from financing activities
rather than as cash flows from operating or investing activities. Notwithstanding this accounting treatment, our securitizations
are structured to legally isolate the receivables from Discover Bank, and we would not expect to be able to access the assets of
our securitization trusts, even in insolvency, receivership or conservatorship proceedings. We do, however, continue to have the
rights associated with our retained interests in the assets of these trusts.
Reconciliations of GAAP to Non-GAAP As-Adjusted Data
To enable the reader to better understand our financial information by reflecting period-over-period data on a consistent
basis, Management’s Discussion and Analysis of Financial Condition and Results of Operations presents our financial
information as of and for the years ended November 30, 2011 and 2010 as compared to non-GAAP as-adjusted results of
operations data for the year ended November 30, 2009, and, where necessary, we have also provided certain information as of
and for the year ended November 30, 2008 and 2007 on a non-GAAP as-adjusted basis. Management believes the non-GAAP
as-adjusted financial information is useful to investors as it aligns with the financial information used in management’s
decision-making process and in evaluating the business.
The following describes the adjustments made to arrive at the non-GAAP as-adjusted financial information:
•Settlement income adjustments - The non-GAAP as-adjusted amounts remove the impact of income received in
connection with the settlement of our antitrust litigation with Visa and MasterCard during the years ended November
30, 2009 and 2008, which resulted in unusually large amounts in other income and affect comparability of results
between periods.
•Special dividend interest adjustments - The non-GAAP as-adjusted amounts exclude the 2009 interest charge related
to our dispute with Morgan Stanley regarding the special dividend agreement, which, among other things, specified
how proceeds of the antitrust litigation with Visa and MasterCard were to be shared.
•Statements No. 166 and 167 adjustments - The non-GAAP as-adjusted amounts show how our financial data would
have been presented if the trusts used in our securitization activities were consolidated into our financial statements
for historical periods prior to fiscal year 2010.
We did not retrospectively adopt Statements No. 166 and 167 and, therefore, the consolidated financial statements
presented in this annual report as of and for the years ended November 30, 2011 and 2010 reflect the new accounting
requirements, but the historical statement of income and statement of cash flows for the year ended November 30, 2009
continue to reflect the accounting applicable prior to the adoption of the new accounting requirements.
The impacts of Statements No. 166 and 167 on our earnings summary, detail of other income and Direct Banking
segment information are reflected in two steps in the reconciliations of GAAP to non-GAAP as-adjusted data in the tables
below. First, we made securitization adjustments to reverse the effect of loan securitization by recharacterizing securitization
income to report interest income, interest expense, provision for loan losses, discount and interchange revenue and loan fee
income in the same line items as non-securitized loans. These adjustments result in a “managed basis” presentation, which we
have historically included in our quarterly and annual reports to reflect the way in which our senior management evaluated our
business performance and allocated resources.
Then, in addition to the adjustments to remove the litigation settlement income and the interest related to the special
dividend paid to Morgan Stanley, adjustments were made to reflect results as if the trusts used in our securitization activities
had been fully consolidated in our historical results. These adjustments include:
• Elimination of interest income and interest expense related to certificated retained interests classified as investment
securities and associated intercompany debt;
• An adjustment to the provision for loan losses for the change in securitized loan receivables;
• Elimination of the revaluation gains or losses associated with the interest-only strip receivable, which was
derecognized upon adoption of Statements No. 166 and 167; and
• An adjustment to reflect the income tax effects related to these adjustments.
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