Discover 2014 Annual Report Download - page 107

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the residual interest and the majority of the most subordinated interests. Because of those involvements, the Company
has, for each trust, i) the power to direct the activities that most significantly impact the economic performance of the
trust, and ii) the obligation (or right) to absorb losses (or receive benefits) of the trust that could potentially be
significant. The Company has determined that it was not the primary beneficiary of any other variable interest entity
during the calendar years ended December 31, 2014 and 2013, fiscal year ended November 30, 2012 or one month
ended December 31, 2012.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in
which the Company has significant influence over operating and financial decisions, the Company applies the equity
method of accounting. The Company also applies the equity method to its investments in qualified affordable housing
projects and similar tax credit partnerships. In cases where the Company's equity investment is less than 20% and
significant influence does not exist, such investments are carried at cost.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes existing
revenue recognition requirements in Topic 605, Revenue Recognition, including an assortment of transaction-specific
and industry-specific rules. The ASU establishes a principles-based model under which revenue from a contract is
allocated to the distinct performance obligations within the contract and recognized in income as each performance
obligation is satisfied. ASU Topic 606 does not apply to rights or obligations associated with financial instruments (for
example, interest income from loans or investments, or interest expense on debt), and therefore the Company’s net
interest income should not be affected. The Company’s revenue from discount and interchange, protection products,
transaction processing and certain fees are within the scope of these rules. Management has not yet completed its
evaluation of the impact, if any, of the new guidance on these revenues. The new revenue recognition model will
become effective for the Company on January 1, 2017. Upon adoption in 2017, the Company will record an
adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest
comparative period presented, with all periods presented under the new rules, or January 1, 2017, without restating
prior periods presented. Management has not yet determined which transition reporting option it will apply.
In January 2014, the FASB issued ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323):
Accounting for Investments in Qualified Affordable Housing Projects. This standard will permit a reporting entity to
make an accounting policy election to account for investments in qualified affordable housing projects using the
proportional amortization method if certain conditions are met. Under this new method, an entity amortizes the initial
cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense (benefit). This treatment will replace the
effective yield method currently permitted for certain investments of this kind. The Company has not historically utilized
the effective yield method, and as a result, implementation of this ASU will not impact the Company’s accounting for its
investments in qualified affordable housing projects unless a subsequent election is made to apply it. In addition to
establishing the conditions under which the proportional amortization method can be used, the ASU calls for additional
disclosures that will enable the reader to understand the nature of the investment and the effect of its measurement and
related tax credits on the Company’s financial position and results of operations. The new guidance is effective for
annual reporting periods beginning after December 15, 2014 and interim periods within those periods, with early
adoption permitted. The standard will require additional disclosure about the nature of the Company's affordable
housing investments, but unless the Company subsequently elects to apply the proportional amortization model, the new
guidance will have no effect on the Company’s financial condition, results of operations or cash flows.
2. 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 $846 million and $719 million of cash and due from banks and $6.4 billion and $5.8 billion of interest-
earning deposits in other banks at December 31, 2014 and 2013, respectively.