eTrade 2003 Annual Report Download - page 64

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Table of Contents
Index to Financial Statements
Available-for-Sale Mortgage-Backed and Investment Securities —The Company classified its debt, mortgage-backed securities and
marketable equity securities as either trading or available-for-sale. None of the Company’s mortgage-backed or investment securities were
classified as held-to-maturity at December 31, 2003 or December 31, 2002.
Available-for-sale securities consist of mortgage-backed securities, asset-backed securities, corporate bonds, municipal bonds, publicly
traded equity securities, U.S. government sponsored enterprise obligations, commercial paper and money market funds. Securities classified as
available-for-sale are carried at fair value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive
income (“AOCI”), net of tax. Fair value is based on quoted market prices, when available. For illiquid securities, fair value is estimated by
risk, liquidity, term, coupon, payment characteristics and other information. Realized and unrealized gains or losses on available-for-sale
securities, except for publicly traded equity securities, are computed using the specific identification cost method. Amortization or accretion of
premiums and discounts are recognized in interest income using the interest method over the expected life of the security. Realized and
unrealized gains or losses on publicly traded equity securities are computed using the average cost method. Realized gains and losses and
declines in fair value judged to be other-than-temporary are included in gain on sales of loans held-for-sale and securities, net for the
Company’
s banking operations; other amounts are included in gain (loss) on investments. Interest earned is included in banking interest income
for banking operations or corporate interest income for corporate investments.
The Company reviews all securities with unrealized losses for other-than-
temporary impairment at each balance sheet date. The Company
considers market value of equity securities below the Company’s cost basis, for a period of greater than six months, as an indication of other-
than-temporary impairment, unless there are other indicators that would cause us to consider an impairment sooner. The Company conducts a
detailed credit review of any security with potential for other-than-temporary impairment. In addition, the Company reviews any security in
which publicly available information indicates a significant credit concern with the issuer.
In addition, impairment of mortgage-backed and asset-backed securities is evaluated in accordance with the Consensus of the Emerging
Issues Task Force (“EITF”) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets which requires a two-step test on certain mortgage-backed and asset-backed securities to determine if other-than-
temporary impairment has occurred. Specifically, impairment is recognized when the security’s fair value is less than its amortized cost and if
the current present value of estimated cash flows has decreased since the last periodic estimate. If the security fails both tests, other-than-
temporary impairment has occurred and the Company writes the security down to fair value.
Asset Securitization and Retained Interests —
An asset securitization involves the transfer of financial assets to another entity in exchange
for cash and/or beneficial interests in the assets transferred. Asset transfers in which the Company surrenders control over the financial assets
are accounted for as sales to the extent that consideration, other than beneficial interests in the transferred assets, is received in the exchange in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140 Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities . The carrying amount of the assets transferred is allocated between the assets sold in these transactions and
is included in gain on sales of loans held-for-sale and securities, net for the difference between the allocated carrying amount of the asset sold
available for beneficial interests; therefore, the Company estimates the fair value based on the present value of the associated expected future
cash flows. In determining the present value of the associated expected future cash flows, management is required to make estimates and
assumptions. The key estimates and assumptions include future default rates, credit losses, discount rates, prepayment speeds and collateral
repayment rates. Retained beneficial interests are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities and EITF 99-20.
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