Discover 2010 Annual Report Download - page 114

payments to customers are generally classified as contra-revenue unless a specifically identifiable benefit is received by
the Company in consideration for the payment and the fair value of such benefit is determinable and measurable. If no
such benefit is identified, then the entire payment is classified as contra-revenue, and included in other income in the
consolidated statements of income in the line item where the related revenues are recorded. If the payment gives rise to
an asset because it is expected to directly or indirectly contribute to future net cash inflows, it is deferred and recognized
over the expected benefit period. The unamortized portion of the deferred incentive payments included in other assets on
the consolidated statements of financial condition was $45.8 million and $44.9 million at November 30, 2010 and
2009, respectively.
Significant Accounting Policies Effective Prior to the Adoption of FASB Statements No. 166 and 167
Loans Held for Sale. Prior to the adoption of FASB Statements No. 166 and 167, loans held for sale generally included
the amount of credit card receivables necessary to support net new securitization transactions expected to take place over
the subsequent three-month period. The amount of existing credit card receivables that would be reclassified as held for
sale was limited to three months from the balance sheet date, as securitizations that were to occur beyond that point
involved a significant proportion of receivables that had not yet been originated, due to customer repayment behavior
and the revolving nature of credit cards. In estimating the amount of credit card receivables that should be classified as
held for sale, the Company considered its ability to access the securitization market given current market conditions,
scheduled maturities of outstanding asset-backed securities, management’s targeted mix of funding sources used, and the
relative availability of the Company’s other funding sources.
The amount of credit card receivables classified as held for sale was determined on a homogeneous portfolio basis,
because the seller’s interest represents an undivided interest in each loan transferred to the securitization trust. Credit card
loan receivables that were classified as held for sale were reported at their par value because management believed that
approximated their fair values as a result of the short-term nature of the assets. An allowance for loan losses does not
apply to loans held for sale.
When credit card receivables classified as held for sale were securitized and beneficial interests issued to third parties,
the loans held for sale balance was reduced, cash was received and amounts due from asset securitization was adjusted
to reflect changes in the Company’s retained interests as applicable. When certificated beneficial interests were retained,
loans held for sale was reduced and the available-for-sale investment securities balance was increased.
Retained Interests in Securitized Assets. The Company periodically transfers credit card loan receivables to asset
securitization trusts. Securitized credit card loan receivables include outstanding principal, interest and fees. Prior to the
adoption of Statements No. 166 and 167, the Company’s securitization transactions were recognized as sales and
accordingly, the Company removed securitized credit card receivables from loan receivables on its consolidated
statements of financial condition. The Company retained interests in the transferred financial assets in various forms
including an undivided seller’s interest, certificated beneficial interests in the trust assets, accrued interest and fees on
securitized credit card receivables (“accrued interest receivable”), cash collateral accounts, servicing rights and rights to
certain excess cash flows remaining after payments to investors in the securitization trust of their contractual rate of return,
the payment of servicing fees to the Company and reimbursement of credit card losses (“interest-only strip receivable”).
The Company included its undivided seller’s interest within loan receivables in the consolidated statements of financial
condition. The Company classified certificated retained beneficial interests as available-for-sale or held-to-maturity
investment securities on the consolidated statements of financial condition at their estimated fair values or amortized costs,
respectively. All other retained interests were recorded on the consolidated statements of financial condition in amounts
due from asset securitization. Certain components of amounts due from asset securitization were short-term in nature and,
therefore, their carrying values approximated fair values. The remaining retained interests in amounts due from asset
securitization were accounted for like trading securities and, accordingly, were marked to fair value each period with
changes in their fair values recorded in securitization income.
Cash flows associated with the securitization of credit card receivables that were originated for investment were
included in cash flows from investing activities. Cash flows related to credit card receivables transferred to the trust during
the term of a securitization in order to maintain a constant level of investor interest in receivables were classified as
operating cash flows, as those receivables were treated as being originated specifically for sale.
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