eTrade 2006 Annual Report Download - page 58

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intangible assets each reporting period to determine whether events and circumstances warrant a revision to the
remaining period of amortization in accordance with SFAS No. 142. Our estimates of fair value of goodwill and
other intangible assets depend on a number of factors, including estimates of future market growth and trends,
forecasted revenue and costs, expected useful lives of the assets, appropriate discount rates and other variables.
Effects if Actual Results Differ
If our estimates of goodwill fair value change due to changes in our businesses or other factors, we may
determine that an impairment charge is necessary. Estimates of fair value are determined based on a complex
model using cash flows and company comparisons. If management’s estimates of future cash flows are
inaccurate, the fair value determined could be inaccurate and impairment not recognized in a timely manner.
Intangible assets are amortized over their estimated useful lives. If changes in the estimated underlying revenues
occurs, impairment or a change in the remaining life may need to be recognized.
Valuation and Expensing of Share-Based Payments
Description
We value and expense employee share-based payments, which is primarily stock options, in accordance
with SFAS No. 123(R). We value each granted option using an option pricing model using assumptions that
match the characteristics of the granted options. We then assume a forfeiture rate that is used to calculate each
period’s compensation expense attributed to these options.
Judgments
We estimate the value of employee stock options using the Black-Scholes-Merton option pricing model.
Assumptions necessary for the calculation of fair value include expected term and expected volatility. These
assumptions are management’s best estimate of the characteristics of the options. Additionally, forfeiture rates
are estimated based on prior option vesting experience.
Effects if Actual Results Differ
If our estimates of employees’ forfeiture rates are not correct at the end of the term of the option, we will
record either additional expense or a reduction in expense in the period it completely vests. This adjustment may
be material to the period in which it is recorded. In addition, option fair value is based on estimates of volatility
determined by us. Many methods are available to determine volatility, so the determination is subjective.
Applying a different method to determine volatility could impact earnings. A 10% change in volatility would
increase or decrease stock option fair value by 6%. A change in fair value would affect all amortization periods.
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