eTrade 2006 Annual Report Download - page 57

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 $7.9 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 $20.8 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 or other liabilities on our
consolidated balance sheet. 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 statement 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. At December 31, 2006 we had a net deferred tax
liability of $58.5 million, net of a valuation allowance of $38.3 million. At December 31, 2005 we had a net
deferred tax asset as of $3.9 million net of a valuation allowance of $39.4 million.
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 December 31, 2006 was $2.1 billion, and we will continue to evaluate it
for impairment at least annually. Our recorded intangible assets at December 31, 2006 were $471.9 million,
which have useful lives between three and thirty years.
Judgments
In 2006, 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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