eTrade 2002 Annual Report Download - page 108

Table of Contents
Index to Financial Statements
Other Assets —Other assets include real estate acquired through foreclosure and repossessed consumer assets. Real estate properties acquired
through foreclosures, commonly referred to as real estate owned (“REO”) and repossessed assets are recorded at fair value less estimated
selling costs at acquisition. Fair value is determined by appraisal or other appropriate valuation method. Losses estimated at the time of
acquisition are charged to the allowance for loan losses. Management performs periodic valuations and establishes a valuation allowance for
REO and repossessed assets through a charge to income if the carrying value of a property exceeds its estimated fair value less estimated selling
costs. The total of REO and repossessed assets was $6.7 million at December 31, 2002 and $3.3 million at December 31, 2001.
Foreign Currency Translation —Assets and liabilities of consolidated subsidiaries outside of the United States are translated into U.S. dollars
using the exchange rate in effect at each period end. Revenues and expenses are translated at the average exchange rate during the period. The
effects of foreign currency translation adjustments arising from differences in exchange rates from period to period are deferred and included in
AOCI as the functional currency of our subsidiaries is their local currency. Currency transaction gains or losses, derived on monetary assets and
liabilities stated in a currency other than the functional currency, are recognized in current operations and have not been significant to the
Company’ s operating results in any period.
Deferred Stock Compensation — On the date restricted common stock is granted to an employee, the Company records the shares granted as
common stock issued and additional paid in capital at the fair market value. An equal and offsetting amount is recorded in shareholders’ equity
as deferred stock compensation. Deferred stock compensation is amortized over the vesting period of the restricted common stock.
Commissions —The Company derives commission revenues from domestic and international retail customer transactions in equity and debt
securities and options. Commission revenues from securities transactions are recognized on a trade date basis.
Principal Transactions —Principal transactions revenues consist principally of revenue from market-making and institutional activities.
E*TRADE Securities provides certain institutional customers with market research and other information under activities arrangements
whereby the institutional customer pays for such research with commissions generated from securities transactions, which is a common industry
practice. Commission revenues from these arrangements are recognized at the time the trades are executed. Commission revenues under these
arrangements were less than 10% of net revenues for all periods presented. Direct costs from these arrangements are expensed as the
commissions are received, in proportion to the cost of the total arrangement. As a result, payments for independent research are deferred or
accrued to properly match expenses at the time commission revenue is earned. For these arrangements, payments for independent research of
$7.1 million were deferred and costs of $24.8 million were accrued at December 31, 2002 and at December 31, 2001, payments of $6.7 million
were deferred and costs of $21.5 million were accrued.
Other Brokerage Related Revenues —Other brokerage related revenues consists primarily of account maintenance fees, mutual fund
management fees, payments for order flow from outside market makers, Business Solutions Group (“BSG”) revenue, professional trading
rebate revenues, electronic communication network (“ECN”) revenues and order handling fees. Payments for order flow revenues are accrued
in the same period in which the related securities transactions are completed or related service is rendered. Included in other brokerage-related
revenues are gains from the sale of shares of certain investments in international stock exchanges of $6.0million in fiscal 2002, none in fiscal
2001 and $11.9 million in fiscal 2000.
Brokerage Interest Income —Brokerage interest income is primarily comprised of interest earned by brokerage subsidiaries on credit extended
to customers to finance purchases of securities on margin, interest earned on cash and investments required to be segregated under Federal or
other regulations and fees on customer assets invested in money market accounts. Interest income is recognized when earned.
77
2003. EDGAR Online, Inc.