eTrade 2003 Annual Report Download - page 68

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Table of Contents
Index to Financial Statements
grant, the resulting stock-based employee compensation cost is reflected in the Company’s reported net income (loss), based on the intrinsic
value.
The following table illustrates the effect on the Company’s reported net income (loss) and earnings per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share amounts):
The underlying assumptions to these fair value calculations are discussed in Note 19.
Comprehensive Income —The Company’s comprehensive income is comprised of net income (loss), foreign currency cumulative
translation adjustments, unrealized gains (losses) on available-for-sale mortgage-backed and investment securities and the effective portion of
the unrealized gains (losses) on financial derivatives in cash flow hedge relationships, net of reclassification adjustments and related taxes.
Earnings Per Share —Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
Financial Derivative Instruments and Hedging Activities —The Company enters into derivative transactions to protect against the risk of
market price or interest rate movements on the value of certain assets and future cash flows. The Company must also recognize certain
contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative
promulgated by SFAS No. 133 , as amended.
Each derivative is recorded on the balance sheet at fair value as a freestanding asset or liability. Financial derivative instruments in
hedging relationships that mitigate exposure to changes in the fair value of assets are considered fair value hedges under SFAS No. 133.
Financial derivative instruments designated in hedging relationships that mitigate the exposure to the variability in expected future cash flows
or other forecasted transactions are considered cash flow hedges. The Company formally documents all relationships between hedging
instruments and hedged items and the risk management objective and strategy for each hedge transaction.
Fair value hedges are accounted for by recording the fair value of the financial derivative instrument and the change in fair value of the
asset being hedged on the consolidated balance sheets with the net difference reported
57
Year Ended December 31,
2003
2002
2001
Net income (loss), as reported
$
203,027
$
(186,405
)
$
(241,532
)
Add back: Stock-based employee compensation expense included in reported
net income (loss), net of tax
2,033
5,522
5,950
Deduct: Total stock-based employee compensation expense determined under
fair value
-
based method for all awards, net of tax
(17,561
)
(19,737
)
(44,410
)
Pro forma net income (loss)
$
187,499
$
(200,620
)
$
(279,992
)
Income (loss) per share:
Basic
—
as reported
$
0.57
$
(0.52
)
$
(0.73
)
Basic
—
pro forma
$
0.52
$
(0.56
)
$
(0.84
)
Diluted
—
as reported
$
0.55
$
(0.52
)
$
(0.73
)
Diluted
—
pro forma
$
0.51
$
(0.56
)
$
(0.84
)