eTrade 2006 Annual Report Download - page 89

Real Estate Owned and Repossessed Assets—Included in the other assets line item in the consolidated
balance sheet is real estate acquired through foreclosure and repossessed consumer assets. Real estate properties
acquired through foreclosures, commonly referred to as 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 asset 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 sold under agreements to repurchase similar
securities, also known as 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 such in the consolidated balance sheet.
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;
• The stock purchase commitment is based on the fair value of the issuer’s equity shares;
• The Company could not be required to net cash settle the stock purchase contract;
• The Company has sufficient authorized and unissued shares available to settle the stock purchase
contract; and
• There is an explicit limit on the number of shares of common stock required to be delivered under the
stock purchase contract.
Based on the Company’s review of the above criterion and other relevant technical requirements, the stock
purchase contracts are included in equity.
Foreign Currency Translation—Assets and liabilities of consolidated subsidiaries outside of the United
States are translated into U.S. dollars, the functional currency of the Company, using the exchange rate in effect
at each period end. Revenues and expenses are translated at the average exchange rate during the period. The
effects of foreign currency translation adjustments arising from differences in exchange rates from period to
period are deferred and included in AOCI as the functional currency of our subsidiaries is their local currency.
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