eTrade 2006 Annual Report Download - page 85

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management businesses. Gain on sales and impairment of investments relates primarily to historical equity
investments of the Company at the corporate level and are not related to the ongoing business of our operating
subsidiaries.
New Balance Sheet Reporting Format—We re-aligned our balance sheet to consolidate several categories
and to change the name of “Other borrowings by Bank subsidiary” to “Other borrowings.” Other borrowings
include non-Bank subsidiary term notes, previously classified in “Accounts payable, accrued and other
liabilities.” Categories consolidated include the following:
• “Investment in Federal Home Loan Bank stock” was added to “Available-for-sale mortgage-backed and
investment securities”;
• “Derivative assets” and “Accrued interest receivable” were added to “Other assets”; and
• “Derivative liabilities” was added to “Accounts payable, accrued and other liabilities.”
These categories were consolidated with other similar items in our balance sheet presentation. The notes to
our consolidated financial statements include detailed derivative asset and liability information.
Use of Estimates—The financial statements were prepared in accordance with GAAP, which require
management to make estimates and assumptions that affect the amounts reported in the 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 allowance for loan
losses and uncollectible margin receivables; 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 $4.9 million and $7.1 million at
December 31, 2006 and 2005, 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.
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 held by the Bank are included in the gain on sales of loans and securities, net line
item and are derived using the specific identification cost method. Realized and unrealized gains and losses on
trading securities held by broker-dealers are recorded in the principal transactions line item and are also derived
by the specific identification method.
Available-for-Sale Mortgage-Backed and Investment Securities—The Company classified its debt, mortgage-
backed securities and marketable equity securities as either trading or available-for-sale. None of the Company’s
mortgage-backed or investment securities were classified as held-to-maturity at December 31, 2006 or 2005.
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