eTrade 2010 Annual Report Download - page 110

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. Customer payables primarily represent customer cash contained within the Company’s
broker-dealer subsidiaries. The Company pays interest on certain customer payables balances.
Comprehensive Loss—The Company’s comprehensive loss is composed of net loss, noncredit portion of
OTTI on debt securities, unrealized gains (losses) on available-for-sale securities, the effective portion of the
unrealized gains (losses) on derivatives in cash flow hedge relationships and foreign currency translation gains
(losses), net of reclassification adjustments and related tax.
Derivative Instruments and Hedging Activities—The Company enters into derivative transactions primarily
to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Each derivative
is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. For financial
statement purposes, the Company’s policy is to not offset fair value amounts recognized for derivative
instruments and fair value amounts related to collateral arrangements under master netting arrangements.
Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge
and, if designated as a hedge, the type of hedge designation. Derivative instruments designated in hedging
relationships that mitigate the exposure to the variability in expected future cash flows or other forecasted
transactions are considered cash flow hedges. Derivative instruments in hedging relationships that mitigate
exposure to changes in the fair value of assets or liabilities are considered fair value hedges. The Company
formally documents at inception all relationships between hedging instruments and hedged items and the risk
management objective and strategy for each hedge transaction. Cash flow and fair value hedge ineffectiveness is
re-measured on a quarterly basis and is included in the gains (losses) on loans and securities, net line item in the
consolidated statement of loss. Cash flows from derivative instruments accounted for as fair value hedges or cash
flow hedges are classified in the same category on the consolidated statement of cash flows as the cash flows
from the items being hedged. The Company also recognizes certain contracts and commitments as derivatives
when the characteristics of those contracts and commitments meet the definition of a derivative. Gains and losses
on derivatives that are not held as accounting hedges are recognized in the gains (losses) on loans and securities,
net line item in the consolidated statement of loss. See Note 8—Accounting for Derivative Instruments and
Hedging Activities.
Fair Value—Fair value is defined 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. The Company determines
the fair value for its financial instruments and for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. In addition, the
Company determines the fair value for nonfinancial assets and nonfinancial liabilities on a nonrecurring basis as
required during impairment testing or by other accounting guidance. See Note 5—Fair Value Disclosures.
Operating Interest Income—Operating interest income is recognized as earned through holding mortgage
related assets, primarily real estate loans and mortgage-backed securities. Other interest-earning assets include
margin receivables, investment securities, cash and equivalents, including cash and investments required to be
segregated under regulatory guidelines, and securities borrowed balances. Operating interest income also
includes the impact of the Company’s derivative transactions related to interest-earning assets.
Operating Interest Expense—Operating interest expense is recognized as incurred primarily through holding
customer cash and deposits. Other interest-bearing liabilities include repurchase agreements, FHLB advances and
other borrowings and securities loaned balances. Operating interest expense also includes the impact of the
Company’s derivative transactions related to interest-bearing liabilities.
Commissions—Commissions are derived primarily from the Company’s customers and are impacted by
both trade types and trade mix. Commissions from securities transactions are recognized on a trade date basis.
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