Discover 2010 Annual Report Download - page 112

Advertising Costs. The Company expenses advertising costs as incurred. Television advertising costs are expensed in
the period in which the advertising is first aired. Advertising costs are recorded in marketing and business development.
Income Taxes. Income tax expense is provided for using the asset and liability method, under which deferred tax assets
and liabilities are determined based on the temporary differences between the financial statement and income tax bases
of assets and liabilities using currently enacted tax rates. See Note 17: Income Taxes for more information about the
Company’s income taxes.
Financial Instruments Used for Asset and Liability Management. The Company enters into derivative financial
instrument contracts, specifically interest rate swaps, to manage interest rate risk arising from certain interest-rate sensitive
assets and liabilities, and it accounts for such transactions in accordance ASC Topic 815, Derivatives and Hedging.
Derivative contracts having positive net fair values, inclusive of net accrued interest receipts or payments, are recorded in
other assets. Derivative contracts with negative net fair values, inclusive of net accrued interest payments or receipts, are
recorded in accrued expenses and other liabilities. With regard to such derivatives hedging interest-bearing deposits or
long-term debt, changes in both the fair value of the derivatives and the gains or losses on the hedged interest-bearing
deposits or long-term debt relating to the risk being hedged are recorded in interest expense and provide offset to one
another. Ineffectiveness related to these fair value hedges, if any, is recorded in interest expense. With regard to
derivatives hedging future cash flows resulting from credit card loan receivables attributable to changes in benchmark
interest rates, changes in the fair value of the derivatives are recorded in other comprehensive income and are
subsequently reclassified into interest income in the period that the hedged forecasted transaction affects earnings.
Ineffectiveness related to these cash flow hedges, if any, is recorded in other income.
Accumulated Other Comprehensive Income. In accordance with the requirements of ASC Topic 220, Comprehensive
Income, the Company records unrealized gains and losses on available-for-sale securities, certain pension adjustments,
changes in the fair value of cash flow hedges and foreign currency translation adjustments in accumulated other
comprehensive income on an after tax basis where applicable. The Company presents accumulated other comprehensive
income, net of tax, in its consolidated statements of changes in stockholders’ equity.
Significant Revenue Recognition Accounting Policies
Loan Interest and Fee Income. Interest on loans is comprised largely of interest on credit card loans and is recognized
based upon the amount of loans outstanding and their contractual interest rate. Interest on credit card loans is included in
loan receivables when billed to the customer. The Company accrues unbilled interest revenue each month from a
customer’s billing cycle date to the end of the month. The Company applies an estimate of the percentage of loans that
will revolve in the next cycle in the estimation of the accrued unbilled portion of interest revenue that is included in
accrued interest receivable on the consolidated statements of financial condition. Interest on other consumer loan
receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable in
the consolidated statements of financial condition.
The Company recognizes fees (except annual fees, balance transfer fees and certain product fees) on loan receivables
in interest income or loan fee income as the fees are assessed. Annual fees, balance transfer fees and certain product fees
are recognized in interest income or loan fee income ratably over the periods to which they relate. Balance transfer fees
are accreted to interest income over the life of the related balance. As of November 30, 2010 and 2009, deferred
revenues related to balance transfer fees, recorded as a reduction of loan receivables, was $43.9 million and $24.9
million, respectively. Loan fee income consists of fees on credit card loans and includes annual, late, returned check, cash
advance and other miscellaneous fees and is reflected net of waivers and charge-offs. Prior to February 2010, the
Company charged overlimit fees that were also recorded in loan fee income.
Pursuant to ASC Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, direct loan origination costs on
credit card loans are deferred and amortized on a straight-line basis over a one-year period and recorded in interest
income from credit card loans. Direct loan origination costs on other loan receivables are deferred and amortized over
the life of the loan and recorded in interest income from other loans. As of November 30, 2010 and 2009, the remaining
unamortized deferred costs related to loan origination were $12.5 million and $20.2 million, respectively, and were
recorded in loan receivables.
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