Discover 2010 Annual Report Download - page 59

• Reclassification of $4.6 billion of certificated retained interests classified as investment securities to loan receivables;
• 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;
• Derecognition of the remaining $0.1 billion value of the interest-only strip receivable, net of tax, recorded in
amounts due from asset securitization and reclassification of the remaining $1.6 billion of amounts due from asset
securitization to restricted cash, loan receivables and other assets; 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.
Beginning with the first quarter 2010, our results of operations no longer reflect securitization income, but instead
report 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 our results of
operations as non-securitized credit card loan receivables and corporate debt. Additionally, we no longer record initial
gains on new securitization activity since securitized credit card loans no longer receive sale accounting treatment. Also,
there are no gains or losses 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 our securitization transactions are being accounted for under
the new accounting rules as secured borrowings rather than asset sales, the cash flows from these transactions are
presented as cash flows from financing activities rather than as cash flows from operating or investing activities.
Notwithstanding this accounting treatment, our securitizations are structured to legally isolate the receivables from
Discover Bank, and we would not expect to be able to access the assets of our securitization trusts, even in insolvency,
receivership or conservatorship proceedings. We do, however, continue to have the rights associated with our retained
interests in the assets of these trusts.
Reconciliations of GAAP to As Adjusted Data
We did not retrospectively adopt Statements No. 166 and 167 and, therefore, the consolidated financial statements
presented in this annual report as of and for the year ended November 30, 2010 reflect the new accounting
requirements, but the historical statement of financial condition as of November 30, 2009 and statements of income and
statements of cash flows for the years ended November 30, 2009 and 2008 continue to reflect the accounting applicable
prior to the adoption of the new accounting requirements.
To enable the reader to better understand our financial information by reflecting period-over-period data on a
consistent basis, this Management’s Discussion and Analysis of Financial Condition and Results of Operations presents
our financial information as of and for the year ended November 30, 2010 as compared to adjusted results of operations
data for the years ended November 30, 2009 and 2008, and, where necessary, we have also provided certain
information as of and for the year ended November 30, 2007 and 2006 on an as adjusted basis. Management believes
the adjusted financial information is useful to investors as it aligns with the financial information used in its decision-
making process and in evaluating the business. The as adjusted amounts:
• show how our financial data would have been presented if the trusts used in our securitization activities were
consolidated into our financial statements for such historical periods;
• remove the impact of income received in connection with the settlement of our antitrust litigation with Visa and
MasterCard during the years ended November 30, 2009 and 2008; and
• exclude the interest charge related to our dispute with Morgan Stanley regarding the special dividend agreement,
which, among other things, specified how proceeds of the antitrust litigation with Visa and MasterCard were to be
shared.
The impacts of Statements No. 166 and 167 on our earnings summary, detail of other income and Direct Banking
segment information are reflected in two steps in the reconciliations of GAAP to as adjusted data in the tables below.
First, we made securitization adjustments to reverse the effect of loan securitization by recharacterizing securitization
income to report interest income, expense, provision for loan losses, discount and interchange revenue and loan fee
income in the same line items as non-securitized loans. These adjustments result in a “managed basis” presentation,
which we have historically included in our quarterly and annual reports to reflect the way in which our senior
management evaluated our business performance and allocated resources.
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