Discover 2010 Annual Report Download - page 79

closure and charge-off experience, actual customer purchase activity and the terms of the rewards programs. We
recognize reward costs as a reduction of discount and interchange revenue in the consolidated statements of income.
If management used a different estimate of forfeitures, our consolidated statement of financial condition and results of
operations could have differed. For example, a 100 basis point decrease in the estimated forfeiture rate as of
November 30, 2010, could have resulted in an increase in accrued expenses and other liabilities of approximately $10
million. The corresponding increase in rewards cost would have been reflected as a decrease in discount and interchange
revenue. See “ – Other Income” and Note 2: Summary of Significant Accounting Policies to our consolidated financial
statements for further details about credit card rewards cost.
Goodwill and Other Nonamortizable Intangible Assets
We recognize goodwill when the purchase price of an acquired business exceeds the total of the fair values of the
acquired net assets. In addition, we have recognized certain other nonamortizable intangible assets in our acquisition of
the Diners Club business. As required by GAAP, we test goodwill and other nonamortizable intangible assets for
impairment annually, or more often if indicators of impairment exist. In evaluating goodwill for impairment, management
must estimate the fair value of the business unit(s) to which the goodwill relates. Because market data concerning
acquisitions of comparable businesses typically are not readily obtainable, other valuation techniques such as earnings
multiples and cash flow models are used in estimating the fair values of these businesses. Similarly, in evaluating the other
nonamortizable intangible assets for potential impairment, management estimates their fair values using discounted cash
flow models. In applying these techniques, management considers historical results, business forecasts, market and
industry conditions and other factors. We may also consult independent valuation experts where needed in applying
these valuation techniques. The valuation methodologies we use involve assumptions about business performance,
revenue and expense growth, discount rates and other assumptions that are judgmental in nature.
If economic conditions deteriorate or other events adversely impact the assumptions used by management in these
valuations, we may be exposed to an impairment loss that, when recognized, could have a material impact on our
consolidated financial condition and results of operations. At November 30, 2010, there were no reporting units or
intangible assets that were at reasonable risk for failing the respective impairment evaluations.
Income Taxes
We are subject to the income tax laws of the jurisdictions where we have business operations, primarily the United
States, its states and municipalities. We must make judgments and interpretations about the application of these inherently
complex tax laws when determining the provision for income taxes and must also make estimates about when in the
future certain items will affect taxable income in the various taxing jurisdictions. Disputes over interpretations of the tax
laws may be settled with the taxing authority upon examination or audit. We regularly evaluate the likelihood of
assessments in each of the taxing jurisdictions resulting from current and subsequent years’ examinations, and tax
reserves are established as appropriate.
Changes in the estimate of income taxes can occur due to tax rate changes, interpretations of tax laws, the status and
resolution of examinations by the taxing authorities, and newly enacted laws and regulations that impact the relative
merits of tax positions taken. When such changes occur, the effect on our consolidated financial condition and results of
operations can be significant. See Note 17: Income Taxes to our consolidated financial statements for additional
information about income taxes.
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