Charles Schwab 2008 Annual Report Download - page 78

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 64 -
Assets and Liabilities Recorded at Fair Value
The Company’s assets recorded at fair value include certain investments segregated and on deposit for regulatory purposes,
other securities owned, and securities available for sale. The Company uses prices obtained from an independent third-party
pricing service to measure the fair value of certain investment securities. The Company validates prices received from the
pricing service using various methods including comparison to prices received from additional pricing services, comparison to
quoted market prices, where available, comparison to internal valuation models, and review of other relevant market data
including implied yields of major categories of securities. The Company does not adjust the prices received from the
independent third-party pricing service unless such prices are inconsistent with SFAS No. 157 and result in a material
difference in the recorded amounts. At December 31, 2008, the Company did not adjust prices received from the independent
third-party pricing service. To measure the fair value of certificates of deposits and treasury securities included in investments
segregated and on deposit for regulatory purposes, the Company uses discounted cash flow models that utilize market-based
inputs including observable market interest rates that correspond to the remaining maturities or next interest reset dates.
Liabilities recorded at fair value are not material.
The following table presents the Company’s fair value hierarchy as of December 31, 2008 for assets and liabilities measured
at fair value:
Quoted Prices
in Active Markets Significant Significant
for Identical Other Observable Unobservable
Assets Inputs Inputs Balance at
(Level 1) (Level 2) (Level 3) Fair Value
Assets
Investments segregated and on deposit for regulatory purposes $ - $ 6,829 $ - $ 6,829
Other securities owned 578 48 - 626
Securities available for sale - 14,446 - 14,446
Other assets (1) - 11 - 11
Total assets at fair value $ 578 $ 21,334 $ - $ 21,912
Liabilities
Accrued expenses and other liabilities (2) $ 2 $ 3 $ - $ 5
(1) Other assets recorded at fair value include derivative contracts.
(2) Accrued expenses and other liabilities include securities sold, not yet purchased, and derivative contracts.
Fair Value of Assets and Liabilities Not Recorded at Fair Value
Descriptions of the valuation methodologies used to estimate the fair value of assets and liabilities not recorded at fair value,
are as follows:
Cash and cash equivalents, receivables, deposits from banking clients, payables, and accrued expenses and other liabilities
include cash and highly liquid investments, receivables and payables from/ to brokers, dealers and clearing organizations,
receivables and payables from/ to brokerage clients, interest and non-interest bearing deposits from banking clients, and
drafts, accounts, taxes, interest, and compensation payable. Assets and liabilities in these categories are short-term in nature
and accordingly are recorded at amounts that approximate fair value.
Cash and investments segregated and on deposit for regulatory purposes include securities purchased under resale
agreements. Securities purchased under resale agreements are recorded at par value plus accrued interest. Securities purchased
under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale
agreement and is highly liquid in nature. Accordingly, the carrying value approximates fair value.
Securities held to maturity include asset-backed securities collateralized by credit card and student loans. Securities held to
maturity are recorded at amortized cost. The fair value of these securities is obtained using an independent third-party pricing
service, as discussed above.