Charles Schwab 2010 Annual Report Download - page 69

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
1. Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities
brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 302
domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K. In addition,
Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles Schwab Bank (Schwab
Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s
proprietary mutual funds, which are referred to as the Schwab Funds .
The accompanying consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the
Company). All material intercompany balances and transactions have been eliminated. These consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the United States, which require management to make
certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates
include other-than-temporary impairment of securities available for sale and securities held to maturity, the valuation of goodwill, the
allowance for loan losses, and legal reserves. Actual results could differ from those estimates. Certain prior-period amounts have been
reclassified to conform to the current period presentation.
2. Summary of Significant Accounting Policies
A
sset management and administration fees: Asset management and administration fees, which include mutual fund service fees and
fees for other asset-based financial services provided to individual and institutional clients, are recognized as revenue over the period
that the related service is provided, based upon average asset balances. The Company earns mutual fund service fees for shareholder
services, administration, and investment management services provided to its proprietary funds, and recordkeeping and shareholder
services provided to third-party funds. Mutual fund service fees are based upon the daily balances of client assets invested in third-
party funds and the Company’s proprietary funds. The Company also earns asset management fees for advisory and managed account
services, which are based on the daily balances of client assets subject to the specific fee for service. The fair values of client assets
included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data.
In 2010 and 2009, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored money market
mutual funds in order to provide a positive return to clients. Under agreements with these funds, the Company may recover such fee
waivers depending on the future performance of the funds and approval by the boards of the respective funds until the third
anniversary of the end of the fiscal year in which such fee waiver occurs, subject to certain limitations. Recoveries of previously-
waived asset management fees are recognized as revenue when substantially all uncertainties about timing and amount of realization
are resolved. Amounts recognized in revenue for recoveries of previously-waived asset management fees were not material in 2010 or
2009.
I
nterest revenue: Interest revenue represents interest earned on certain assets, which include cash and cash equivalents, cash and
investments segregated, receivables from brokers, dealers, and clearing organizations, receivables from brokerage clients, other
securities owned, securities available for sale, securities held to maturity, loans to banking clients, and loans held for sale. Interest
revenue is recognized in the period earned based upon average or daily asset balances and respective interest rates.
Securities transactions: Trading revenue includes commission and principal transaction revenues. Clients’ securities transactions are
recorded on the date that they settle, while the related commission revenues and expenses are recorded on the date that the trade
occurs. Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity, which
are recorded on a trade date basis.
Cash and cash equivalents: The Company considers all highly liquid investments with original maturities of three months or less that
are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include
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