eTrade 2005 Annual Report Download - page 123

Table of Contents
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 or liability being hedged on the consolidated balance sheets with the net difference, or hedge ineffectiveness, reported as fair
value adjustments of financial derivatives in the consolidated statements of income. Cash payments or receipts and related accruals
during the reporting period on derivatives included in fair value hedge relationships are recorded as an adjustment to interest income
on the hedged asset or liability. 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 no longer designated in an accounting hedge relationship are recorded in
gain on sales of loans and securities, net, in the consolidated statements of income. The accumulated adjustment of the carrying
amount of the hedged interest-earning asset or liability is recognized in earnings as an adjustment to interest income over the expected
remaining life of the asset using the effective interest 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 the consolidated balance sheets, with the effective portion of the change in fair value of the financial derivative
recorded in AOCI, net of tax in the consolidated balance sheets. 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 income. 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 and securities, net in the consolidated statements of income. Derivative gains and losses that are not held as
accounting hedges are recognized as gain on sales of loans and securities, net in the consolidated statements of income 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 and securities, net in the consolidated statements of income.
Revenue Recognition
Commissions
—The Company derives commissions revenue from its retail and institutional customers. Commissions revenue from
securities transactions are recognized on a trade date basis. The Company receives commissions for providing certain institutional
customers with market research and other information, which is a common industry practice. These commissions revenue 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 $6.0 million were deferred and costs of $19.4 million were accrued at December31, 2005 and payments of $6.3
million were deferred and costs of $18.6 million were accrued at December31, 2004.
Principal Transactions
—Principal transactions consist primarily of revenue from market-making activities. Market-making activities
are the matching of buyers and sellers of securities and include transactions where the Company will purchase securities for its
balance sheet with the intention of resale to transact the customer’s buy or sell order.
Gain on Sales of Loans and Securities, net
—Gain on sales of originated loans are recognized at the date of settlement and are based
on the difference between the cash received and the carrying value of the related loans sold, less related transaction costs. In cases
where the Company retains the servicing rights associated with loans sold, the gain recognized is the difference between cash received
and the allocated basis of the loans sold, less the related transaction costs. In accordance with SFAS No.140, the allocated basis of the
loans, which is determined at the sale date, is the result of the allocation of basis between the loans sold and the associated servicing
right, based on the relative fair values of the loans at the date of transfer.
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2006. EDGAR Online, Inc.