eTrade 2006 Annual Report Download - page 84

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND 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 consumers under the brand
“E*TRADE Financial.” The Company offers investing, trading, banking 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—Discontinued Operations, the operations of certain
businesses have been accounted for as discontinued operations in accordance with the 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.
New Income Statement Reporting Format—During the year ended December 31, 2006, the Company
modified the format of our consolidated income statement to a format that we believe provides a clearer picture
of our financial performance and is more consistent with the common presentation found in the financial services
industry. We re-ordered the revenue section by placing net operating interest income, which we previously
referred to as net interest income, first, and non-interest income second. In addition, we updated our expense
presentation to eliminate the remaining bank/brokerage lines. In conjunction with this change, we created a new
expense category, “Clearing and servicing.” This new category includes trade clearing-related expense,
previously included in “Commissions, clearance and floor brokerage” and most expenses previously included in
“Servicing and other banking expenses.” We also consolidated “Fair value adjustments of financial derivatives”
into the “Other” expense category. Information related to fair value adjustments of financial derivatives is
detailed in Note 9—Accounting for Derivative Financial Instruments and Hedging Activities to the consolidated
financial statements.
In particular, we report corporate interest income and expense separately from operating interest income and
expense. We believe reporting these two items separately provides a clearer picture of the financial performance
of our operations than would a presentation that combined these two items. Our operating interest income and
expense is generated from the operations of the Company and is a broad indicator of our success in our banking,
lending and balance sheet management businesses. Our corporate debt, which is the primary source of the
corporate interest expense has been used primarily to finance acquisitions, such as Harrisdirect and BrownCo and
generally has not been downstreamed to any of our operating subsidiaries.
Similarly, we report gain on sales and impairment of investments separately from gain on sales of loans and
securities, net. We believe reporting these two items separately provides a clearer picture of the financial
performance of our operations than would a presentation that combined these two items. Gain on sales of loans
and securities, net are the result of activities in our operations, namely our lending and balance sheet
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