eTrade 2003 Annual Report Download - page 66

Table of Contents
Index to Financial Statements
Goodwill and Other Intangibles, net —Goodwill and other intangibles, net represents the excess of the purchase price over the fair value
of net tangible assets acquired through the Company’
s business combinations. For the periods prior to January 1, 2002, goodwill was amortized
using the straight-line method based on an estimated useful life of five to twenty years. Upon adoption of SFAS No. 142, on January 1, 2002,
the Company ceased the amortization of goodwill and intangible assets with indefinite lives and tested the carrying amount for impairment
resulting in a cumulative adjustment discussed in Note 9. The Company tests goodwill and intangible assets with indefinite lives for
impairment on at least an annual basis. The Company evaluates the remaining useful lives of other intangible assets each reporting period to
determine whether events and circumstances warrant a revision to the remaining period of amortization. Other intangibles are amortized either
under the straight-line or double-declining balance methods over estimated useful lives of three to thirty years.
Real Estate Owned and Repossessed Assets —Included in other assets is 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.
Income Taxes —The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which
prescribes the use of the asset and liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet
date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is
more likely than not that a portion or all of the deferred tax assets will not be realized.
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 consist principally of revenue from market-making and institutional activities, as well as
proprietary trading gains. E*TRADE Securities receives commissions for providing certain institutional customers with market research and
other information, which is a common industry practice. These commission revenues contributed less than 10% of the Company’s 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 $7.7 million were deferred and costs of $17.6 million were
accrued at December 31, 2003 and payments of $7.1 million were deferred and costs of $24.8 million were accrued at December 31, 2002.
Other Brokerage-Related Revenues —Other brokerage-related revenues consists of account maintenance fees, payments for order flow
from third party market makers, propriety fund revenues, stock option plan administration revenues, professional trading rebate revenues,
electronic communication network (“ECN”)
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