eTrade 2007 Annual Report Download - page 95

Servicing Rights—Servicing assets are recognized when the Company sells a loan and retains the related
servicing rights. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
an amendment of SFAS No. 140. This statement establishes, among other things, the accounting for all
separately recognized servicing assets and liabilities. The Company adopted this statement on January 1, 2007
and the impact was not material to the Company’s financial condition, results of operations or cash flows. SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and liabilities be initially
measured at fair value. For subsequent measurements, SFAS No. 156 permits companies to choose between
using an amortization method or a fair value measurement method for reporting purposes. As of
December 31, 2007, the Company continued to account for servicing rights under the amortization method. The
fair value of the servicing retained is estimated based on market quotes for similar servicing assets. Servicing
assets are amortized in proportion to and over the period of estimated net servicing income. The Company
measures impairment by stratifying the servicing assets based on the characteristics of the underlying loans and
by interest rates. Impairment is recognized through a valuation allowance for each stratum. The valuation
allowance is adjusted to reflect the excess of the servicing assets’ cost basis for a given stratum over its fair
value. Any fair value in excess of the cost basis of servicing assets for a given stratum is not recognized. The
Company estimates the fair value of each stratum based on an industry standard present value of cash flows
model. The Company recognizes both amortization of servicing rights and impairment charges in service charges
and fees in the consolidated statement of income (loss). Servicing assets are included in the other assets line item
in the consolidated balance sheet. As of January 1, 2008, the Company elected to account for servicing rights
under the fair value measurement method. The transition adjustment to opening retained earnings as of January 1,
2008 related to the fair value measurement election did not have a material impact on the Company’s financial
condition. In addition, the Company does not expect the fair value measurement election to have a material
impact on the Company’s financial condition, results of operations or cash flows in future periods.
Real Estate Owned and Repossessed Assets—Included in the other assets line item in the consolidated
balance sheet is real estate acquired through foreclosure and repossessed consumer assets. Real estate properties
acquired through foreclosures, commonly referred to as REO and repossessed assets, are recorded at fair value,
less estimated selling costs at acquisition.
Income Taxes—The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, which prescribes the use of the asset and liability method whereby deferred tax asset or liability
account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation
allowances are established, when necessary, to reduce deferred tax assets when it is more likely than not that a
portion or all of a given deferred tax asset will not be realized. In accordance with SFAS No. 109, income tax
expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or
liability balance during the year plus any change in valuation allowances and (ii) current tax expense, which
represents the amount of tax currently payable to or receivable from a taxing authority. Uncertain tax positions
are only recognized to the extent they satisfy the criteria under Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (“FIN 48”), which states that an uncertain tax position must be more likely than not of being
sustained upon examination. The amount of tax benefit recognized is the largest amount of tax benefit that is
more than fifty percent likely of being sustained on ultimate settlement of an uncertain tax position.
Securities Sold Under Agreements to Repurchase—Securities sold under agreements to repurchase similar
securities, also known as repurchase agreements, are collateralized by fixed- and variable-rate mortgage-backed
securities or investment grade securities. Repurchase agreements are treated as financings for financial statement
purposes and the obligations to repurchase securities sold are reflected as such in the consolidated balance sheet.
Customer Payables—Customer payables to customers and non-customers represent credit balances in
customer accounts arising from deposits of funds and sales of securities and other funds pending completion of
securities transactions. The Company pays interest on certain customer payables balances.
92