eTrade 2010 Annual Report Download - page 77

impaired debt security; it is more likely than not that we will be required to sell the impaired debt security before
recovery of the security’s amortized cost basis; or we do not expect to recover the entire amortized cost basis of
the security. If we intend to sell an impaired debt security or if it is more likely than not that we will be required
to sell the impaired debt security before recovery of the security’s amortized cost basis, we will recognize OTTI
in earnings equal to the entire difference between the security’s amortized cost basis and the security’s fair value.
For impaired debt securities that we do not to intend to sell and it is not more likely than not that we will be
required to sell before recovery of the security’s amortized cost basis, if we do not expect to recover the entire
amortized cost basis of the securities, we will separate OTTI into two components: 1) the amount related to credit
loss, recognized in earnings; and 2) the noncredit portion of OTTI, recognized through other comprehensive
income (loss). For the year ended December 31, 2010, we recognized $37.7 million of net impairment on certain
securities in our non-agency CMO portfolio.
Judgments
Our evaluation of whether we intend to sell an impaired debt security considers whether management has
decided to sell the security as of the balance sheet date. Our evaluation of whether it is more likely than not that
we will be required to sell an impaired debt security before recovery of the security’s amortized cost basis
considers the likelihood of sales that involve legal, regulatory or operational requirements. For impaired debt
securities that we do not to intend to sell and it is not more likely than not that we will be required to sell before
recovery of the security’s amortized cost basis, we use both qualitative and quantitative valuation measures to
evaluate whether we expect to recover the entire amortized cost basis of the security. We consider all available
information relevant to the collectibility of the security, including credit enhancements, security structure,
vintage, credit ratings and other relevant collateral characteristics.
Effects if Actual Results Differ
Determining if a security has OTTI is complex and requires judgment by management about circumstances
that are inherently uncertain. Subsequent evaluations of these securities, in light of factors then prevailing, may
result in additional OTTI in future periods. If all available-for-sale and held-to-maturity securities with fair
values lower than amortized cost as of December 31, 2010 were other-than-temporarily impaired and the gross
OTTI was recorded through earnings, we would record a pre-tax loss of $407.9 million.
Accounting for Derivative Instruments
Description
We enter into derivative transactions primarily to protect against interest rate risk on the value of certain
assets, liabilities and future cash flows. Accounting for derivatives differs significantly depending on whether a
derivative is designated as a hedge. Derivative instruments designated in hedging relationships that mitigate
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. In order to qualify for hedge accounting treatment,
documentation must indicate the intention to designate the derivative as a hedge of a specific asset or liability or
a future cash flow. Effectiveness of the hedge must be monitored over the life of the derivative.
Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset
or liability. Fair value hedges are accounted for by recording the fair value of the derivative instrument and the
fair value of the asset or liability being hedged on the consolidated balance sheet. To the extent that the hedge is
ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected
in the gains (losses) on loans and securities, net line item in the consolidated statement of loss. Cash flow hedges
are accounted for by recording the fair value of the derivative instrument on the consolidated balance sheet. The
effective portion of the changes in fair value of the derivative instrument in a cash flow hedge is reported as a
component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both active
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