eTrade 2004 Annual Report Download - page 79

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Table of Contents
Index to Financial Statements
Advertising Costs —
Advertising production costs are expensed when the initial advertisement is run. Costs of communicating advertising
are expensed as the services are received.
Technology Development Costs —Technology development costs are charged to operations as incurred. Technology development costs
include costs incurred in the development and enhancement of software used in connection with services provided by the Company that do not
otherwise qualify for capitalization treatment as internally developed software costs in accordance with SOP 98-1 .
Stock-Based Compensation —The Company has stock-based employee compensation plans, which are described more fully in Note 21.
The Company accounts for the plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees ,
and related Interpretations which requires compensation expense to be recognized for any intrinsic value in stock options at the grant date.
The following table illustrates the effect on the Company’s reported net income (loss) and earnings per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation , as amended by SFAS No. 148, Accounting
for Stock
-Based Compensation—Transition and Disclosure, to stock-based employee compensation (in thousands, except per share amounts):
The underlying assumptions to these fair value calculations are discussed in Note 21.
Comprehensive Income —The Company’s comprehensive income is comprised of net income (loss), foreign currency cumulative
translation adjustments, unrealized gains (losses) on available-for-sale mortgage-backed and investment securities and the effective portion of
the unrealized gains (losses) on financial derivatives in cash flow hedge relationships, net of reclassification adjustments and related taxes.
Earnings Per Share —Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
Financial Derivative Instruments and Hedging Activities —The Company enters into derivative transactions to protect against the risk of
market price or interest rate movements on the value of certain assets and future cash flows. The Company must also recognize certain
contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative
promulgated by SFAS No. 133 , Accounting for Derivative Instruments and Hedging Activities, as amended.
71
Year Ended December 31,
2004
2003
2002
Net income (loss), as reported
$
380,483
$
203,027
$
(186,405
)
Add back: Stock-based employee compensation expense, net of tax included in
reported net income (loss), net of tax
3,081
2,033
5,522
Deduct: Total stock-based employee compensation expense determined under
fair value
-
based method for all awards, net of tax
(22,640
)
(17,561
)
(19,737
)
Pro forma net income (loss)
$
360,924
$
187,499
$
(200,620
)
Income (loss) per share:
Basic
—
as reported
$
1.04
$
0.57
$
(0.52
)
Basic
—
pro forma
$
0.98
$
0.52
$
(0.56
)
Diluted
—
as reported
$
0.99
$
0.55
$
(0.52
)
Diluted
—
pro forma
$
0.94
$
0.51
$
(0.56
)