eTrade 2005 Annual Report Download - page 119

Table of Contents
reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Servicing Rights
—Servicing assets are recognized when the Company sells a loan and retains the related servicing rights. The
servicing rights are initially recorded at their allocated cost basis based on the relative fair value of the loan sold and the servicing
rights are retained at the date of the sale in accordance with SFAS No.140. The fair value of the servicing retained is estimated based
on market quotes for similar servicing assets. Servicing assets are amortized in proportion to and over the period of estimated net
servicing income. The Company measures impairment by stratifying the servicing assets, based on the characteristics of the
underlying loans and by interest rates. Impairment is recognized through a valuation allowance for each stratum. The valuation
allowance is adjusted to reflect the excess of the servicing assets’ cost basis for a given stratum over its fair value. Any fair value in
excess of the cost basis of servicing assets for a given stratum is not recognized. The Company estimates the fair value of each stratum
based on an industry standard present value of cash flows model. The Company recognizes both amortization of servicing rights and
impairment charges in service charges and fees in the consolidated statements of income. Servicing assets are included in other assets
in the consolidated balance sheets.
Real Estate Owned and Repossessed Assets
—Included in other assets in the consolidated balance sheets is real estate acquired
through foreclosure and repossessed consumer assets. Real estate properties acquired through foreclosures, commonly referred to as
real estate owned (“REO”) and repossessed assets, are recorded at fair value, less estimated selling costs at acquisition.
Income Taxes
—The Company accounts for income taxes in accordance with SFAS No.109,
Accounting for Income Taxes,
which
prescribes the use of the asset and liability method whereby deferred tax asset or liability account balances are calculated at the
balance sheet date using current tax laws and rates in effect. Valuation allowances are established, when necessary, to reduce deferred
tax assets when it is
more likely than not
that a portion or all of a given deferred tax assets will not be realized. In accordance with
SFAS No.109, income tax expense includes (i)deferred tax expense, which generally represents the net change in the deferred tax asset
or liability balance during the year plus any change in valuation allowances and (ii)current tax expense, which represents the amount of
tax currently payable to or receivable from a taxing authority plus amounts accrued for expected tax deficiencies (including both tax and
interest.) Accruals for expected tax deficiencies are recorded in accordance with SFAS No.5,
Accounting for Contingencies
, when
management determines that a tax deficiency is both probable and reasonably estimable.
Securities Sold Under Agreements to Repurchase
—Securities under agreements to repurchase similar securities (“Repurchase
Agreements”) are collateralized by fixed- and variable-rate mortgage-backed securities or investment grade securities. Repurchase
Agreements are treated as financings for financial statement purposes and the obligations to repurchase securities sold are reflected as
borrowings in the consolidated balance sheets.
Mandatory Convertible Debt
—The Company accounts for its mandatory convertible debt by allocating the proceeds using the
relative fair value of the stock purchase contracts and the debt securities on the date of issuance. The issue costs are deferred and
allocated to the debt securities and the stock purchase contracts based on their relative fair values at issuance date. The portion of
issuance costs allocated to the debt is amortized over the life of the debt using the interest method.
The value of the stock purchase contracts is included in equity based on the requirements of SFAS No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
, and EITF Issue No. 00-19,
Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.
The Company evaluated the mandatory
convertible debt under SFAS No. 150 and EITF No. 00-19. In order for the stock purchase contracts to be included in equity, the
following statements must be met.
•
The obligation settlement amount is not based on a fixed monetary amount known at inception,
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2006. EDGAR Online, Inc.