eTrade 2011 Annual Report Download - page 110

Income Taxes—Deferred income taxes are recorded when revenues and expenses are recognized in different
periods for financial statement purposes than for tax return purposes. Deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances
are established, when necessary, to reduce deferred tax assets when it is more likely than not that a portion or all
of a given deferred tax asset will not be realized. Income tax expense (benefit) includes (i) deferred tax expense
(benefit), which generally represents the net change in the deferred tax asset or liability balance during the year
plus any change in valuation allowances and (ii) current tax expense (benefit), which represents the amount of
tax currently payable to or receivable from a taxing authority. Uncertain tax positions are only recognized to the
extent they satisfy the accounting for uncertain tax positions criteria included in the income taxes accounting
guidance, which states that in order to recognize an uncertain tax position it must be more likely than not that it
will be sustained upon examination. For uncertain tax positions, tax benefit is recognized for cases in which it is
more than fifty percent likely of being sustained on ultimate settlement. See Note 15—Income Taxes.
Securities Sold Under Agreements to Repurchase—Securities sold under agreements to repurchase the same
or similar securities, also known as repurchase agreements, are collateralized by fixed- and variable-rate
mortgage-backed securities or investment grade securities. Repurchase agreements are treated as secured
borrowings for financial statement purposes and the obligations to repurchase securities sold are therefore
reflected as liabilities in the consolidated balance sheet.
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 Income (Loss)—The Company’s comprehensive income (loss) is composed of net income
(loss), noncredit portion of OTTI on debt securities, unrealized gains 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 on loans and securities, net line item in the
consolidated statement of income (loss). Cash flows from derivative instruments in hedging relationships 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 on loans and securities, net line
item in the consolidated statement of income (loss). See Note 7—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
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