Discover 2010 Annual Report Download - page 107

entity during the year ended November 30, 2010 and that it was not the primary beneficiary of any variable interest
entity during the years ended November 30, 2009 and 2008 under the consolidation rules in effect during those periods.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the
Company has significant influence over operating and financial decisions, the Company applies the equity method of
accounting. In cases where the Company’s equity investment is less than 20% and significant influence does not exist,
such investments are carried at cost.
Recently Issued Accounting Pronouncements
The application of the following guidance will only affect disclosures and therefore will not impact the Company’s
financial condition, results of operations or cash flows.
In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU
No. 2010-20 requires a greater level of disaggregation in disclosures relating to the credit quality of the Company’s
financing receivables and allowance for loan losses. ASU 2010-20 also requires enhanced disclosures around
nonaccrual and past due financing receivables, impaired loans and loan modifications. The standard is effective for the
first interim or annual reporting periods ending on or after December 15, 2010, and will apply beginning with the
Company’s Form 10-Q for the quarter ending February 28, 2011. In January 2011, the FASB announced that it was
deferring the effective date of new disclosure requirements for troubled debt restructurings prescribed by ASU 2010-20.
The effective date for those disclosures will be concurrent with the effective date for proposed ASU, Receivables (Topic
310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. Currently, that guidance is anticipated to
be effective for interim and annual periods ending after June 15, 2011.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair
value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of
Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the
presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The
amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about
inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The
Company’s disclosures about fair value measurements, including the new disclosures which were applicable to the
Company beginning in 2010, are presented in Note 22: Fair Value Disclosures. The disclosures concerning gross
presentation of Level 3 activity are effective for fiscal years beginning after December 15, 2010.
2. Change in Accounting Principle
Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets-an amendment of
FASB Statement No. 140 (“Statement No. 166”, codified within ASC Topic 860, Transfers and Servicing) and Statement
of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“Statement No. 167”,
codified within ASC Topic 810, Consolidation) became effective for the Company on December 1, 2009.
Statement No. 166 amended the accounting for transfers of financial assets. Under Statement No. 166, the trusts used
in the Company’s securitization transactions are no longer exempt from consolidation. Statement No. 167 prescribes an
ongoing assessment of the Company’s involvement in the activities of the trusts and the Company’s rights or obligations to
receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those
variable interest entities (“VIEs”) must be consolidated in the Company’s financial statements. In accordance with
Statement No. 167, the Company concluded it is the primary beneficiary of the Discover Card Master Trust I (“DCMT”)
and the Discover Card Execution Note Trust (“DCENT”) and accordingly, the Company began consolidating the trusts on
December 1, 2009. Using the carrying amounts of the trust assets and liabilities as prescribed by Statement No. 167, the
Company recorded a $21.1 billion increase in total assets, a $22.4 billion increase in total liabilities and a $1.3 billion
decrease in stockholders’ equity (comprised of a $1.4 billion decrease in retained earnings offset by a $0.1 billion
increase in accumulated other comprehensive income). These amounts were comprised of the following transition
adjustments, which were treated as noncash activities for purposes of preparing the 2010 consolidated statement of cash
flows:
• Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-
party investors;
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