eTrade 2007 Annual Report Download - page 66

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, the expiration of relevant statutes of limitations, resolution with taxing
authorities of uncertain 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, 2007 was $1.9 billion, and we will continue to evaluate it
for impairment at least annually. Our recorded intangible assets at December 31, 2007 were $430.0 million,
which have useful lives between three and thirty years.
Judgments
In connection with our annual impairment test of goodwill, the entire amount of goodwill associated with
our balance sheet management business, which had a significant decline in fair value during the fourth quarter of
2007, was determined to be impaired. We also evaluate the remaining useful lives on 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.
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