Charles Schwab 2014 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)
- 60 -
impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative
assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term
interest rates and the ability to access capital, or Company specific factors such as market capitalization in excess of net
assets, trends in revenue generating activities, and merger or acquisition activity.
If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a
reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units
(defined as the Company’s businesses for which financial information is available and reviewed regularly by management)
and compares it to their carrying values. The estimated fair values of the reporting units are established using an income
approach based on a discounted cash flow model that includes significant assumptions about the future operating results and
cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their
respective industries, and a market capitalization analysis. Based on the Company’s analysis, fair value significantly
exceeded the carrying value for all reporting units as of its annual testing date.
Intangible assets
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. The Company does not have any indefinite-lived intangible assets.
Guarantees and indemnifications
The Company recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation
undertaken in issuing the guarantee. The fair values of the obligations relating to standby letter of credit agreements (LOCs)
are estimated based on fees charged to enter into similar agreements, considering the creditworthiness of the counterparties.
The fair values of the obligations relating to other guarantees are estimated based on transactions for similar guarantees or
expected present value measures.
Income taxes
The Company provides for income taxes on all transactions that have been recognized in the consolidated financial
statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be
settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other
changes in income tax laws, are recorded in earnings in the period during which such changes are enacted. The Company’s
unrecognized tax benefits, which are included in accrued expenses and other liabilities, represent the difference between
positions taken on tax return filings and estimated potential tax settlement outcomes. Interest and penalties relating to
unrecognized tax benefits are recorded in income tax expense.
Stock-based compensation
Stock-based compensation includes employee and board of director stock options, restricted stock units, and restricted stock
awards. The Company measures compensation expense for these share-based payment arrangements based on their estimated
fair values as of the awards’ grant date. The fair value of the share-based award is recognized over the vesting period as
stock-based compensation. Stock-based compensation expense is based on awards expected to vest and therefore is reduced
for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture
experience and revised in subsequent periods if actual forfeitures differ from those estimates. The excess tax benefits from
the exercise of stock options and the vesting of restricted stock awards are recorded in additional paid-in capital.