eTrade 2008 Annual Report Download - page 69

judgments prove to be inaccurate, the allowance for loan losses could be insufficient to cover actual losses. These
losses would result in a decrease in our net income as well as a decrease in the level of regulatory capital at
E*TRADE Bank.
Fair Value Measurements
Description
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. We determine the fair value of our financial
instruments and for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a recurring basis in accordance with SFAS No. 157. We will not adopt certain
provisions of this statement until January 1, 2009 as they relate to nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in the financial statements on a recurring basis. Examples of
assets and liabilities for which we have not applied the provisions of SFAS No. 157 include reporting units and
indefinite-lived intangible assets measured at fair value in impairment tests under SFAS No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”), nonfinancial long-lived assets measured at fair value for an
impairment assessment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS No. 144”) as well as nonfinancial liabilities for exit or disposal activities initially measured at fair value
under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).
Judgments
In determining fair value, we use various valuation approaches, including market, income and/or cost
approaches. The fair value hierarchy established in SFAS No. 157 requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a
market-based measure considered from the perspective of a market participant. As such, even when market
assumptions are not readily available, our own assumptions reflect those that market participants would use in
pricing the asset or liability at the measurement date. The standard describes the following three levels used to
classify fair value measurements:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
The availability of observable inputs can vary from instrument to instrument and in certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s
level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement. The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a
quarterly basis.
Effects if Actual Results Differ
As of December 31, 2008, 23% and 1% of our total assets and total liabilities, respectively, represented
instruments measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis
categorized as Level 3 as of December 31, 2008 represented less than 1% of our total assets and total liabilities.
Our assessment of the significance of a particular input to the fair value measurement of an instrument requires
judgment and consideration of factors specific to the instrument.
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