Discover 2010 Annual Report Download - page 108

• Consolidation of $0.1 billion of cash collateral accounts and the associated debt issued from the trusts;
• Reclassification of $2.3 billion of held-to-maturity investment securities to loan receivables;
• Reclassification of $2.3 billion of available-for-sale investment securities to loan receivables and reversal of $0.1
billion, net of tax, of related unrealized losses previously recorded in other comprehensive income;
• Recording of a $2.1 billion allowance for loan losses, not previously required under GAAP, for the newly
consolidated and reclassified credit card loan receivables;
• Reversal of all amounts recorded in amounts due from asset securitization through (i) derecognition of the remaining
$0.1 billion value of the interest-only strip receivable, net of tax, (ii) reclassification of $0.8 billion of cash collateral
accounts and $0.3 billion of accumulated collections to restricted cash, (iii) reclassification of $0.2 billion to unbilled
accrued interest receivable, and (iv) reclassification of $0.3 billion of billed accrued interest receivable to loan
receivables; and
• Recording of net deferred tax assets of $0.8 billion, largely related to establishing an allowance for loan losses on
the newly consolidated and reclassified credit card loan receivables.
The assets of the consolidated VIEs include restricted cash and certain credit card loan receivables, which are restricted
to settle the obligations of those entities and are not expected to be available to the Company or its creditors. Liabilities of
the consolidated VIEs include secured borrowings for which creditors or beneficial interest holders do not have recourse
to the general credit of the Company.
Beginning with the Company’s statements of income for the year ended November 30, 2010, the Company no longer
reports securitization income, but instead reports interest income, net charge-offs and certain other income associated
with all securitized loan receivables, and interest expense associated with debt issued from the trusts to third-party
investors in the same line items in the Company’s statement of income as non-securitized credit card loan receivables and
corporate debt. Additionally, the Company no longer records initial gains on new securitization activity since securitized
credit card loans no longer receive sale accounting treatment. Also, there are no gains or losses recorded on the
revaluation of the interest-only strip receivable as that asset is not recognizable in a transaction accounted for as a
secured borrowing. Because the Company’s securitization transactions are accounted for under the new accounting rules
as secured borrowings rather than asset sales, the cash flows from securitization transactions are presented as cash flows
from financing activities rather than as cash flows from operating or investing activities.
The Company’s statements of income for the years ended November 30, 2009 and 2008 and its statement of financial
condition as of November 30, 2009 have not been retrospectively adjusted to reflect the amendments to ASC 810 and
ASC 860. Therefore, current period results and balances will not be comparable to prior period amounts.
3. Summary of Significant Accounting Policies
Cash and Cash Equivalents. Cash and cash equivalents is defined by the Company as cash on deposit with banks,
including time deposits and other highly liquid investments, with maturities of 90 days or less when purchased. Cash and
cash equivalents included $0.4 billion and $0.5 billion of cash and due from banks and $4.7 billion and $12.5 billion of
interest-earning deposits in other banks at November 30, 2010 and 2009, respectively.
Restricted Cash. Restricted cash includes cash whereby the Company’s ability to withdraw funds at any time is
contractually limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or
other obligations.
Short-term investments. Short-term investments include certificates of deposit with maturities greater than 90 days but
less than one year when purchased.
Investment Securities. At November 30, 2010, investment securities consisted of credit card asset-backed securities
issued by other institutions, U.S. Treasury and U.S. government agency obligations, corporate debt securities, mortgage-
backed securities issued by government agencies and state agency bonds. Investment securities which the Company has
the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. All
other investment securities are classified as available-for-sale, as the Company does not hold investment securities for
trading purposes. Available-for-sale investment securities are reported at fair value with unrealized gains and losses, net
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