eTrade 2002 Annual Report Download - page 111

Table of Contents
Index to Financial Statements
Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138, Accounting for Certain Derivatives Instruments and Hedging
Activities, and as interpreted by the FASB and the Derivative Implementation Group (collectively “SFAS No. 133”).
Effective October 1, 2000, the Company adopted SFAS No. 133, which establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of SFAS No. 133
resulted in an $82,500 charge, net of tax, reported as a cumulative effect of a change in accounting principle and a $6.2 million decrease, net of
tax, in shareholders’ equity in the Company’ s consolidated financial statements for the three months ended December 31, 2000.
All derivatives are required to be recorded on the balance sheet at fair value as a freestanding asset or liability. Financial derivative instruments
in hedging relationships that mitigate exposure to changes in the fair value of assets are considered fair value hedges under SFAS No. 133.
Financial derivative instruments designated in hedging relationships that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. The Company formally documents all relationships between hedging instruments
and hedged items and the risk management objective and strategy for each hedge transaction.
Fair value hedges are accounted for by recording the fair value of the financial derivative instrument and the change in fair value of the asset
being hedged on the consolidated balance sheets with the net difference reported as fair value adjustments of financial derivatives in the
consolidated statements of operations. Accordingly, the net difference or hedge ineffectiveness, if any, is recognized currently in the
consolidated statements of operations in other income (expenses) as the fair value adjustments of financial derivatives. Cash payments or
receipts and related amounts accrued during the reporting period on derivatives included in fair value hedge relationships are recorded as an
adjustment to interest income on the hedged asset. If a financial derivative in a fair value hedging relationship is no longer effective,
de-designated from its hedging relationship, or terminated, the Company discontinues fair value hedge accounting for the derivative and the
hedged item. Changes in the fair value of these derivative instruments after the discontinuance of fair value hedge accounting are recorded in
gains on sales of loans held-for-sale and other securities, net, in the consolidated statements of operations. The accumulated adjustment of the
carrying amount of the hedged interest-earning asset is recognized in earnings as an adjustment to interest income over the expected remaining
life of the asset using the effective interest rate method.
Cash flow hedges are accounted for by recording the fair value of the financial derivative instrument as either a freestanding asset or a
freestanding liability in our consolidated balance sheets, with the effective portion of the change in fair value of the financial derivative
recorded in AOCI within shareholders’ equity, net of tax. Amounts are then included in interest expense as a yield adjustment in the same
period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivative is
reported as fair value adjustments of financial derivatives in the consolidated statements of operations. If it becomes probable that a hedged
forecasted transaction will not occur, amounts included in AOCI related to the specific hedging instruments are reported as gain on sales of
loans held-for-sale and other securities, net in the consolidated statements of operations.
Derivative gains and losses not considered highly effective in hedging the change in fair value or expected cash flows of the hedged item are
recognized in the consolidated statement of operations as gain on sales of loans held-for-sale and other securities, net as these derivatives do not
qualify for hedge accounting under SFASNo.133. If a financial derivative ceases to be highly effective as a hedge, hedge accounting is
discontinued prospectively and the financial derivative instrument continues to be recorded at fair value with changes in fair value being
reported as gain on sales of loans held-for-sale and other securities, net in the consolidated statements of operations.
Prior to October 1, 2000, unrealized gains and losses on financial derivatives used for hedging purposes were generally not required to be
reported in the consolidated statements of financial condition. In order to be
80
2003. EDGAR Online, Inc.