Charles Schwab 2010 Annual Report Download - page 73

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A
doption of New Accounting Standards
Transfers of Financial Assets: On January 1, 2010, the Company adopted new guidance on accounting for transfers of financial assets
for transfers occurring after January 1, 2010. This new guidance removes the concept of a qualifying special-purpose entity and
amends the requirements for a transfer of a portion of a financial asset to be accounted for as a sale and related disclosures. There
were no transfers of financial assets during 2010 for which this guidance was applicable.
Consolidation of Variable Interest Entities: On January 1, 2010, the Company adopted new guidance on consolidation of variable
interest entities (VIEs). This new guidance amends the consolidation guidance applicable to VIEs, including changing the approach to
determining a VIE’s primary beneficiary (the reporting entity that must consolidate a VIE) and the frequency of reassessment. The
adoption of this new guidance did not impact the Company’s financial position, results of operations, earnings per share (EPS), or
cash flows.
N
ew Accounting Standard Not Yet Adopted
Goodwill Impairment Test: In December 2010, the FASB issued new guidance on when to perform the second step in the two-step
goodwill impairment test, which is effective for all goodwill impairment tests performed after January 1, 2011. Specifically, if the
carrying value of a reporting unit, as computed in step one of the goodwill impairment test, is zero or negative, step two must be
performed when it is more likely than not that goodwill is impaired; under these circumstances, entities can no longer assume that no
impairment exists because fair value, as computed in step two, would generally be greater than the zero. The adoption of this new
guidance is not expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.
3. Business Acquisition
On November 9, 2010, the Company completed its acquisition of substantially all of the assets of Windward Investment
Management, Inc. (Windward) for $106 million in common stock and $44 million in cash. Windward was an investment advisory
firm that managed diversified investment portfolios comprised primarily of exchange-traded fund securities.
The Company’s consolidated financial statements include the net assets and results of operations associated with this acquisition from
November 9, 2010. Pro-forma financial information for the business acquired from Windward is not presented as it is not material to
the Company’s consolidated financial statements. As a result of a fair value allocation, the Company recorded goodwill of
$103 million and intangible assets of $47 million, both of which are deductible for tax purposes over a period of 15 years. The
intangible assets, which primarily relate to customer relationships and technology, will be amortized on a straight-line basis over
11 years and 9 years, respectively. The goodwill was allocated to the Investor Services and Institutional Services segments in the
amounts of $30 million and $73 million, respectively.
In connection with the acquisition, the Company established employee retention and incentive programs that provide for cash
payments up to an aggregate $100 million. These payments are contingent upon the employees’ continued employment and
achievement of certain assets under management thresholds prior to specified time periods concluding 102 months (the Service
Period) following the acquisition, with payments due at intervals throughout the period if earned. These payments will be recorded as
compensation expense if such payments are deemed probable, and will be recognized over the Service Period. At December 31, 2010,
the estimated liability under this program was not material.
4. Receivables from Brokerage Clients
Receivables from brokerage clients are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts was
not material at December 31, 2010 or 2009. Receivables from brokerage clients consist primarily of margin loans to brokerage clients
of $10.3 billion and $7.9 billion at December 31, 2010 and 2009, respectively. Securities owned by brokerage clients are held as
collateral for margin loans. Such collateral is not reflected in the consolidated financial statements. Margin loans that were unsecured
or partially secured were $8 million at December 31, 2010, and were not
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