eTrade 2002 Annual Report Download - page 42

Table of Contents
Index to Financial Statements
All of our acquisitions from October 2000 through the end of fiscal 2002 have been accounted for under the purchase method; and, accordingly,
the operating results of these entities are combined with those of the Company since the dates of acquisition.
On January 22, 2001, our fiscal year end was changed from September 30 to December 31. Fiscal 2002 and fiscal 2001 represent the twelve
months ended December 31. Fiscal 2000 represents the twelve months ended September30.
SUMMARY OF CRITICAL POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have
been prepared in conformity with accounting principles generally accepted in the United States of America. Because we operate in the financial
services industry, we follow certain accounting guidance used by the brokerage and banking industries. One of the more significant impacts of
these rules is that interest income and expense from our lending and banking activities, as well as gains and losses from sales of loans and
banking investments, are included in net revenues, whereas corporate interest income and expense, as well as gains and losses on corporate
investments are reported as non-operating income and expense. Our consolidated balance sheet is not separated into current and noncurrent
assets and liabilities. Certain financial assets, such as mortgage-backed and investment securities are carried at fair market value in our
consolidated balance sheet while other assets, such as loans receivable, are carried at historic values.
Note 2 to Consolidated Financial Statements contains a summary of our significant accounting policies, many of which require the use of
estimates and assumptions that affect the amounts reported in the consolidated financial statements for the periods presented. We believe that of
our significant accounting policies, the following are based on estimates and assumptions that require complex, subjective judgments which can
materially impact reported results:
• Determination of the allowance for loan losses (see also Note 6 to Consolidated Financial Statements);
• Classification and valuation of certain investments (see also Note 7 to Consolidated Financial Statements);
• Valuation and accounting for financial derivatives (see also Note 28 to Consolidated Financial Statements);
• Estimate of accrued restructuring costs (see also Note 21 to Consolidated Financial Statements); and
• Valuation of goodwill (see also Note 23 to Consolidated Financial Statements).
Determination of the allowance for loan losses
Through the Bank, we originate and purchase mortgage and consumer loans that we intend to hold for the foreseeable future or until maturity or
pay-off. We may not be able to collect all principal and interest due on these loans. Allowance for loan losses represents management’ s estimate
of probable credit losses inherent in our loan portfolio as of the balance sheet date. We perform regular reviews in order to identify inherent
losses and to assess the overall credit risk of our portfolio. The determination of the allowance for loan losses involves the monitoring of
delinquency, default and historical loss experience. We make estimates and assumptions regarding existing but yet unidentified losses caused
by current economic conditions. If we do not adequately reserve for these uncollectible loans, we may incur additional charges to loan losses in
our consolidated financial statements.
In determining our allowance for loan losses, we have established both specific and general allowances. The amount of the specific allowance is
determined through a loan-by-loan analysis of certain large dollar real estate and consumer loans. Loans not individually reviewed are evaluated
2003. EDGAR Online, Inc.