eTrade 2005 Annual Report Download - page 115

Table of Contents
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
—E*TRADE Financial Corporation (together with its subsidiaries, “E*TRADE” or the “Company”) is a global company
offering a wide range of financial services to the consumer under the brand “E*TRADE FINANCIAL.” The Company offers investing,
trading, cash management and lending products and services to its retail and institutional customers.
Basis of Presentation
—
The consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries. Entities in which the Company holds at least a 20% ownership or in which there are other indicators of significant
influence are generally accounted for by the equity method. Entities in which the Company holds less than 20% ownership and does
not have the ability to exercise significant influence are generally carried at cost. Intercompany accounts and transactions are
eliminated in consolidation. The Company evaluates investments including joint ventures, low income housing tax credit partnerships
and other limited partnerships to determine if the Company is required to consolidate the entities under the guidance of FASB
Interpretation No.46,
Consolidation of Variable Interest Entities-an interpretation of ARB No.51 (“FIN 46R”.)
Certain prior period items in these consolidated financial statements have been reclassified to conform to the current period
presentation. As discussed in Note 3, the operations of certain businesses have been accounted for as discontinued operations in
accordance with Statement of Financial Accounting Standards (“SFAS”) No.144,
Accounting for the Impairment or Disposal of
Long-Lived Assets
. Accordingly, results of operations from prior periods have been reclassified to discontinued operations. Unless
noted, discussions herein pertain to the Company’s continuing operations.
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 in which 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; valuation of goodwill and other intangibles and
valuation and expensing of share-based payments.
Financial Statement Descriptions and Related Accounting Policies
—Below are descriptions and accounting policies for the
Company’s financial statement categories.
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 $7.1 million and
$23.7million at December31, 2005 and 2004, 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. Certain cash balances, related to
collateralized financing transactions by our brokerage subsidiaries, are required to be segregated for the exclusive benefit of our
brokerage customers.
Brokerage Receivables, net and Payables
—Brokerage receivables represent credit extended to customers to finance their purchases
of securities by borrowing against securities they currently own, as well as commission
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