eTrade 2005 Annual Report Download - page 83

Table of Contents
reported results would be significantly affected. Revised accounting interpretations of existing literature could materially impact our
financial results. If 10% of the fair value of derivatives classified in liabilities were determined to relate to derivatives that do not qualify
for hedge accounting treatment, the adjustment would reduce income by $3.8 million before taxes. Similarly, if 10% of the fair value of
derivatives included in assets were determined to not qualify for hedge accounting treatment, the result would be $15.2 million in
additional pre-tax income. The most significant effect of not qualifying for hedge accounting treatment is the earnings volatility that
would be created by marking the derivatives to market as interest rates change.
Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowances
Description
In preparing our consolidated financial statements, we calculate our income tax expense based on the tax laws in the various
jurisdictions where we conduct business. This requires us to estimate our current tax obligations and required reserves for potential tax
deficiencies and to assess temporary differences between the financial statement carrying amounts and the tax bases of assets and
liabilities. These differences result in deferred tax assets and liabilities, the net amount of which we show as other assets on our
consolidated balance sheets. We must also assess the likelihood that each of our deferred tax assets will be realized. To the extent we
believe that realization is not
more likely than not
, we establish a valuation allowance. When we establish a valuation allowance or
increase this allowance in a reporting period, we generally record a corresponding tax expense in our consolidated statements of
income. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the
valuation allowance is reversed, which generally reduces our overall income tax expense. Our net deferred tax asset as of December31,
2005 and 2004 was $3.9 million and $41.1 million, respectively, net of a valuation allowance of $39.4 million and $52.7 million,
respectively.
Judgments
Management must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and
any valuation allowance to be recorded against our net deferred tax asset. Changes in our estimate of these taxes occur periodically
due to changes in the tax rates, changes in our business operations, implementation of tax planning strategies, resolution with taxing
authorities of issues with previously taken tax positions and newly enacted statutory, judicial and regulatory guidance. These changes
in judgment as well as differences between our estimates and actual amount of taxes ultimately due, when they occur, affect accrued
taxes and can be material to our operating results for any particular reporting period.
Effects if Actual Results Differ
These changes, when they occur, affect accrued taxes and can be material to our operating results for any particular reporting period.
Valuation of Goodwill and Other Intangibles
Description
We review goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes
indicate the carrying value of an asset may not be recoverable in accordance with SFAS No.142. Our recorded goodwill at December31,
2005 was $2.0 billion, and we will continue to evaluate it for impairment at least annually. Our recorded intangible assets at December31,
2005 were $532.1 million, which have useful lives between three and thirty years.
Judgments
In 2005, we performed our annual impairment test of goodwill with the assistance of a third party. This evaluation indicated that no
impairment charges were necessary. We also evaluate the remaining useful lives on
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2006. EDGAR Online, Inc.