Discover 2015 Annual Report Download - page 75

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During the fourth quarter of 2013, we changed the date of our annual impairment test for non-amortizable
intangible assets from June 1 to October 1. This non-amortizable intangible assets impairment test date change was
applied prospectively beginning on October 1, 2013 and had no effect on the consolidated financial statements.
At December 31, 2015, we had non-amortizable intangibles of $155 million. 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 December 31, 2015, based on the annual impairment testing performed, there was no
impairment recorded on any non-amortizable intangible asset.
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 16: Income Taxes to our consolidated financial statements for
additional information about income taxes.
Purchased Credit-Impaired Loans
The estimate of expected future cash flows on PCI loans determines the amount of interest income we can
recognize in future periods and impacts whether a loan loss reserve must be established for these loans. We reevaluate,
by pool, the amount and timing of expected cash flows quarterly using updated loan portfolio characteristics as well as
assumptions regarding expected borrower default and prepayment behavior. Because estimates of expected future cash
flows on PCI loans involve assumptions and significant judgment, it is reasonably possible that others could derive
different estimates than ours for the same periods. In addition, changes in estimates from one period to the next can
have a significant impact on our consolidated financial condition and results of operations. A decrease in expected cash
flows involving an increase in estimated credit losses would result in an immediate charge to earnings for the
recognition of a loan loss provision. Increases or decreases in expected cash flows related solely to changes in
estimated prepayments or to changes in variable interest rate indices would result in prospective yield adjustments over
the remaining life of the loans. An increase in expected cash flows due to a reduction in expected credit losses would
result first in the reversal of any previously established loan loss reserve on PCI loans through an immediate credit to
earnings and then, if needed, a prospective adjustment to yield over the remaining life of the loans.
If management used a different estimate of expected borrower defaults, our consolidated statement of financial
condition and results of operations could have differed. For example, a 10% increase in the expected borrower default
rate of each PCI loan pool as of December 31, 2015 could have resulted in an additional impairment of up to $8
million. This impairment would have been reflected as an increase in provision for loan losses and a decrease in the
carrying value of the PCI loans. The accounting and estimates used in our calculations are discussed further in Note 5:
Loan Receivables to our consolidated financial statements.