eTrade 2009 Annual Report Download - page 109

The loss on the Debt Exchange did not significantly impact the Company’s shareholders’ equity as the loss
was substantially offset by a simultaneous increase in additional paid-in capital related to the amortization of the
premium on the newly-issued non-interest-bearing convertible debentures. The $725.0 million premium was
offset by $17.8 million in capitalized debt issuance costs that resulted in a net premium on the newly-issued
non-interest-bearing convertible debentures of $707.2 million. If the newly-issued convertible debentures had
been interest-bearing, the net premium would have been amortized as a reduction to interest expense over the life
of the convertible debentures under the effective interest method. However, since the newly-issued convertible
debentures are non-interest-bearing, the amortization of the premium would have resulted in the Company
recording interest income on a liability (a negative yield). Based on the accounting guidance for similar debt
instruments, the Company immediately amortized the entire net premium to additional paid-in capital.
Financial Statement Descriptions and Related Accounting Policies—Below are descriptions and
accounting policies for certain of the Company’s financial statement categories.
Cash and Equivalents—For the purpose of reporting cash flows, the Company considers all highly liquid
investments with original or remaining maturities of three months or less at the time of purchase that are not
required to be segregated under federal or other regulations to be cash and equivalents. Cash and equivalents are
composed of interest-bearing and non-interest-bearing deposits, certificates of deposit, commercial paper, funds
due from banks and federal funds. Cash and equivalents included $2.4 billion and $2.7 billion at December 31,
2009 and 2008, respectively, of overnight cash deposits that the Company maintains with the Federal Reserve
Bank.
Cash and Investments Required to be Segregated Under Federal or Other Regulations—Cash and
investments required to be segregated under federal or other regulations consist of interest-bearing and
non-interest-bearing cash accounts and U.S. Treasuries. Certain cash balances and investments, related to
collateralized financing transactions by the Company’s brokerage subsidiaries, are required to be segregated for
the exclusive benefit of the Company’s brokerage customers.
Trading Securities—Trading securities are bought and held principally for the purpose of selling them in the
near term and are carried at fair value. Realized and unrealized gains and losses on securities classified as trading
held by the Bank are included in the gains (losses) on loans and securities, net line item and are derived using the
specific identification method. Realized and unrealized gains and losses on trading securities from market-
making activities are included in the principal transactions line item and are also derived by the specific
identification method.
Available-for-Sale Mortgage-Backed and Investment Securities—The Company generally classifies its
investments in debt securities and marketable equity securities as either trading or available-for-sale. None of the
Company’s debt securities were classified as held-to-maturity as of December 31, 2009 or 2008.
Available-for-sale securities consist primarily of debt securities, specifically residential mortgage-backed
securities, as of December 31, 2009 and 2008. Securities classified as available-for-sale are carried at fair value,
with the unrealized gains and losses reflected as a component of accumulated other comprehensive loss, net of
tax. Realized and unrealized gains or losses on available-for-sale debt securities are computed using the specific
identification method. Interest earned on available-for-sale debt securities is included in operating interest
income. Amortization or accretion of premiums and discounts are also recognized in operating interest income
using the effective interest method over the life of the security.
Realized gains and losses on available-for-sale debt securities, other than OTTI, are included in the gains
(losses) on loans and securities, net line item. Available-for-sale securities that have an unrealized loss (impaired
securities) are evaluated for OTTI at each balance sheet date. OTTI is included in the net impairment line item.
Beginning in the second quarter of 2009, the Company’s OTTI evaluation for available-for-sale debt securities
reflects the Company’s adoption of the amended OTTI accounting guidance. The Company considers OTTI for
an available-for-sale debt security to have occurred if one of the following conditions are met: the Company
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