eTrade 2008 Annual Report Download - page 73

identifying significant, objective evidence that we will be able to realize our deferred tax assets in the future. We
reviewed the estimated future taxable income for our retail and institutional segments separately and determined
that our net operating losses in 2007 and 2008 were due solely to the credit losses in our institutional segment.
We believe these losses were caused by the crisis in the residential real estate and credit markets which
significantly impacted our asset-backed securities portfolio and our home equity loan portfolios in 2007 and
continued to generate credit losses in 2008. We estimate that these credit losses will continue in future periods;
however, we ceased the business activities which we believe are the root cause of these losses. Therefore, while
we do expect credit losses to continue in future periods, we do expect these amounts to decline when compared
to our credit losses in 2007 and 2008. Our retail segment generated substantial book taxable income for each of
the last six years and we estimate that it will continue to generate taxable income in future periods at a level
sufficient enough to generate taxable income for the Company as a whole. We consider this to be significant,
objective evidence that we will be able to realize our deferred tax assets in the future.
Our analysis of the need for a valuation allowance recognizes that we are in a cumulative book taxable loss
position as of the three-year period ended December 31, 2008, which is considered significant, objective
evidence that we may not be able to realize some portion of our deferred tax assets in the future. However, we
believe we are able to rely on our forecasts of future taxable income and overcome the uncertainty created by the
cumulative loss position.
Effects if Actual Results Differ
Changes in our tax expense (benefit) due to the actual effective tax rates differing from our estimates, when
they occur, affect accrued taxes and can be material to our operating results for any particular reporting period.
In evaluating the need for a valuation allowance on our net deferred tax assets, we estimated future taxable
income based on management approved forecasts. This process required significant judgment by management
about matters that are by nature uncertain. If future events differ significantly from our current forecasts, a
valuation allowance may need to be established, which would have a material adverse effect on our results of
operations, financial condition and our regulatory capital position at E*TRADE Bank. In addition, a significant
portion of the net deferred tax asset relates to a $2.3 billion federal tax loss carryforward, the utilization of which
may be further limited in the event of certain material changes in the ownership of the Company. As of
December 31, 2008, we had net deferred tax assets of $1.0 billion.
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, 2008 was $1.9 billion, and we will continue to evaluate it
for impairment at least annually. Our recorded intangible assets net of amortization at December 31, 2008 were
$386.1 million, which have useful lives between five and thirty years.
Judgments
In connection with our annual impairment test of goodwill, we concluded that the goodwill was not
impaired. We recognize that as of December 31, 2008, our market capitalization was significantly less than the
amount of goodwill recorded on our books. We believe this condition is due to the crisis in the residential real
estate and credit markets which has significantly impacted the value of our loan portfolio assumed within our
market capitalization. The value of this portfolio is contained in our balance sheet management business, which
is a reporting unit in the institutional segment. The goodwill for the balance sheet management business was
written off in entirety in the fourth quarter of 2007. The vast majority of the goodwill remaining on our balance
sheet is connected to our retail brokerage business, which is a reporting unit in the retail segment. Our evaluation
indicates that this unit has a fair value far in excess of the goodwill assigned to it.
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