Discover 2010 Annual Report Download - page 153

The following are the amounts recognized in earnings and other comprehensive income related to assets categorized
as Level 3 during the respective periods (in thousands):
For the Years Ended
November 30,
2010 2009 2008
Interest income – interest accretion........................................................................................................................ $ 0 $ 15,569 $ 104
Other income – gain (loss) on investment securities.................................................................................................. 19,556 (2,837) (49,095)
Securitization income – net revaluation of retained interests ...................................................................................... 0 (160,087) (117,943)
Amount recorded in earnings ........................................................................................................................... 19,556 (147,355) (166,934)
Unrealized gains (losses) recorded in other comprehensive income, pre-tax ................................................................ (7,455) (14,909) (42,881)
Total realized and unrealized gains (losses) ........................................................................................................ $12,101 $(162,264) $(209,815)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. The Company also has assets that under
certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those
associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair
value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During
the year ended November 30, 2010, the Company had no impairments related to these assets.
As of November 30, 2010, the Company had not made any fair value elections with respect to any of its eligible
assets and liabilities as permitted under ASC 825-10-25.
23. Derivatives and Hedging Activities
The Company uses derivatives to manage its exposure to various financial risks. The Company entered into interest rate
swap agreements as part of its interest rate risk management program. The Company also entered into foreign exchange
forward contracts to manage the gains and losses that arise from certain foreign currency denominated receivables of
one of its subsidiaries. The foreign exchange forward contracts are not designated as hedges, but provide a hedge of the
volatility in earnings that arises from converting foreign denominated balance sheet items into the functional currency. The
Company does not enter into derivatives for trading or speculative purposes. All derivatives are recorded in other assets
at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values.
Derivatives may give rise to counterparty credit risk. The Company enters into derivative transactions with established
dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved prior to
engaging in any transaction with the Company. Counterparties are monitored on a periodic basis by the Company to
ensure compliance with the Company’s risk policies and limits.
Derivatives designated as Hedges
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of
the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges.
Cash Flow Hedges. The Company uses interest rate swaps to manage its exposure to changes in interest rates related
to future cash flows resulting from credit card loan receivables. These transactions are hedged for a maximum period of
three years. The derivatives are designated as a hedge of the risk of overall changes in cash flows on the Company’s
portfolios of prime-based interest receipts and qualify for hedge accounting in accordance with ASC Topic 815,
Derivatives and Hedging (“ASC 815”).
The effective portion of the change in the fair value of derivatives designated as cash flow hedges is recorded in other
comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows
affect earnings. The ineffective portion of the change in fair value of the derivative, if any, is recognized directly in
earnings. Amounts reported in accumulated other comprehensive income related to derivatives at November 30, 2010
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