eTrade 2009 Annual Report Download - page 83

a valuation allowance for deferred tax assets and record a charge to income if we determine, based on available
evidence at the time the determination is made, that it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
We did not establish a valuation allowance against our federal deferred tax assets as of December 31, 2009
as we believe that it is more likely than not that all of these assets will be realized. Our evaluation focused on
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 trading and investing and balance sheet management
segments separately and determined that our net operating losses since 2007 are due solely to the credit losses in
our balance sheet management 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 and our home equity loan
portfolios in 2007 and continued to generate credit losses in 2008 and 2009. We estimate that these credit losses
will continue in future periods; however, we ceased purchasing asset-backed securities and home equity loans
which we believe are the root cause of the majority 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 the
three-year period ending in 2009. Our trading and investing 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.
A key component of our evaluation of the need for a valuation allowance was our level of corporate interest
expense, which represents our most significant non-segment related expense. Our estimates of future taxable
income included this expense, which reduces the amount of segment income available to utilize our federal
deferred tax assets. Therefore, a decrease in this expense in future periods would increase the level of estimated
taxable income available to utilize our federal deferred tax assets. As a result of the Debt Exchange, we reduced
our annual cash interest payments by approximately $200 million. We believe this decline in cash interest
payments significantly improves our ability to utilize our federal deferred tax assets in future periods when
compared to evaluations in prior periods which did not include this decline in corporate interest payments.
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, 2009, 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 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, 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 and our financial condition.
In addition, a significant portion of the net deferred tax asset relates to a $1.4 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.
Valuation of Goodwill and Other Intangibles
Description
We review goodwill and purchased intangible assets with indefinite lives for impairment on at least an
annual basis or when events or changes indicate the carrying value of an asset may not be recoverable. Our
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