eTrade 2004 Annual Report Download - page 78

Table of Contents
Index to Financial Statements
property and equipment at the point at which the conceptual formulation, design and testing of possible software project alternatives are
complete and management authorizes and commits to funding the project. The Company does not capitalize pilot projects and projects where it
believes that future economic benefits are less than probable. Internally developed software costs include the cost of software tools and licenses
used in the development of the Company’s systems, as well as payroll and consulting costs.
Investment in Federal Home Loan Bank (“FHLB”) Stock —Investment in FHLB stock is carried at its amortized cost, which
approximates fair value.
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. The Company tests goodwill and intangible assets with
indefinite lives for impairment on at least an annual basis or when certain events occur. 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.
Servicing Rights —The Company recognizes servicing assets when it sells loans and retains the related servicing rights. Servicing rights
are initially recorded at allocated cost based on the relative fair value of the loans sold and servicing retained at the date of sale in accordance
with SFAS No. 140. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. A valuation
allowance, if required, is adjusted to reflect the excess of the carrying value of the servicing assets over fair value.
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. In accordance with SFAS No. 109, income tax expense
includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during the year plus
any change in valuation allowances and (ii) current tax expense, which represents the amount of tax currently payable to or receivable from a
taxing authority plus amounts accrued for expected tax deficiencies (including both tax and interest). Accruals for expected tax deficiencies are
recorded in accordance with SFAS No. 5, Accounting for Contingencies , when management determines that a tax deficiency is both probable
and reasonably estimable.
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 to compensation expense over the vesting period of the
restricted common stock.
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