eTrade 2006 Annual Report Download - page 40

Other Income (Expense)
Other income (expense) decreased $42.4 million to income of $26.3 million for 2005 compared to 2004.
This decrease was due primarily to lower gain on the sale and impairment of investments of $45.0 million and
higher corporate interest expense of $26.4 million resulting from an increase in acquisition-related senior notes in
2005, partially offset by the $23.0 million loss on early extinguishment of debt in 2004. During 2005, we sold
shares of our investments in SBI, Archipelago Holdings, Inc., Ameritrade Holding Corporation and ISE resulting
in gains of $82.7 million. During 2004, gain on sales and impairment of investments was related primarily to
gain on sales of our investments in SBI in the amount of $130.6 million.
Income Tax Expense
Income tax expense from continuing operations increased $48.1 million or 26% for 2005 compared to 2004.
The increase in income tax expense was related to the increase in pre-tax income over the comparable periods.
Our effective tax rates for 2005 and 2004 were 34.0% and 32.2%, respectively. The lower effective tax rate for
2004 was due principally to tax benefits recognized in 2004 in connection with the sale of partnership interests
which generated an excess tax basis adjustment and the closure of several open IRS tax issues.
Discontinued Operations
Our net gain (loss) from discontinued operations was a loss of $17.5 million for 2005 and a loss of
$1.3 million for 2004. During 2005, our discontinued operations included operating results from our proprietary
trading business E*TRADE Professional Securities, LLC, our professional agency business E*TRADE
Professional Trading, LLC and the origination business of Consumer Finance Corporation. During 2004, our
discontinued operations included operating results from E*TRADE Access.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change of $1.6 million after tax ($2.8 million pre-tax) for 2005 resulted
from the adoption of SFAS No. 123(R) and Staff Accounting Bulletin No. 107, Share-Based Payment, effective
July 1, 2005, which required us to record compensation expense for stock options.
Prior to our adoption of SFAS No. 123(R), we recorded compensation expense for restricted stock awards
on a straight-line basis over their vesting period. If an employee forfeited the award prior to vesting, we reversed
out the previously expensed amounts in the period of forfeiture. As required upon adoption of SFAS No. 123(R),
we must base the accruals of compensation expense on the estimated number of awards for which the requisite
service period is expected to be rendered. Actual forfeitures are no longer recorded in the period of forfeiture.
The pre-tax credit of $2.8 million in cumulative effect of accounting change represents the amount by which
compensation expense would have been reduced in periods prior to adoption of SFAS No. 123(R) for restricted
stock awards outstanding on July 1, 2005 that are anticipated to be forfeited.
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