eTrade 2004 Annual Report Download - page 75

Table of Contents
Index to Financial Statements
Previously, these costs were recorded based on a company-department level, whereas, now these costs are reported based on their type.
For example compensation and benefits was included in each of cost of services, selling and marketing, technology development and general
and administrative.
Use of Estimates
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and related notes for the periods presented. Actual results could differ from management’s estimates. Material estimates that
management believes near-term changes could reasonably occur include: allowances for loan losses and uncollectible margin loans;
classification and valuation of certain investments; valuation and accounting for financial derivatives; estimates of effective tax rates, deferred
taxes and valuation allowances; and valuation of goodwill and intangibles. The Company’s investments in venture funds reflect changes in the
fair value of their portfolio investments, including estimated values of non-public companies, which may be subject to adjustments. The
Company also estimates the value of real estate and repossessed assets acquired in connection with foreclosures and repossessions.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents —For the purpose of reporting cash flows, the Company considers all highly liquid investments with original or
remaining maturities of three months or less at the time of purchase that are not required to be segregated under Federal or other regulations to
be cash equivalents. Cash and equivalents are composed of interest-bearing and non-interest-bearing deposits, certificates of deposit,
commercial paper, funds due from banks and Federal funds. Cash and equivalents included $23.7 million and $11.1 million at December 31,
2004 and 2003, respectively, of overnight cash deposits that the Company is required to maintain with the Federal Reserve Bank.
Cash and Investments Required to be Segregated Under Federal or Other Regulations —Cash and investments required to be segregated
under Federal or other regulations consist primarily of interest-bearing cash accounts. At December 31, 2003, amounts also included
government-backed securities purchased under agreements to resell (“Resale Agreements”). Resale Agreements are accounted for as
collateralized financing transactions and are recorded at their contractual amounts, which approximate fair value. The Company obtains
possession of collateral with a market value equal to or in excess of the principal amount loaned under Resale Agreements. These balances,
held by our broker-dealer subsidiaries, are maintained in a special reserve bank account for the exclusive benefit of brokerage customers in
accordance with Securities and Exchange Commission (“SEC”) Rule 15c 3-3.
Securities Borrowed and Securities Loaned —Deposits paid for securities borrowed and deposits received for securities loaned are
recorded at the amount of cash collateral advanced or received. Deposits paid for securities borrowed transactions require the Company to
deposit cash with the lender. With respect to deposits received for securities loaned, the Company receives collateral in the form of cash in an
amount generally in excess of the market value of the securities loaned. Interest income and interest expense are recorded on an accrual basis.
The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded,
as necessary.
Trading Securities —Certain trading securities and financial derivative instruments, that are not designated for hedge accounting, are
bought and held principally for the purpose of selling them in the near term and are carried at estimated fair value based on quoted market
prices. Realized and unrealized gains and losses on securities classified as trading and held by the Bank are included in gain on sales of loans
held-for-sale and securities, net and are derived using the specific identification cost method. Realized and unrealized gains and losses on
trading securities are recorded in principal transactions for brokerage activities and are also derived by the specific identification method.
67