eTrade 2006 Annual Report Download - page 90

Currency transaction gains or losses, derived on monetary assets and liabilities stated in a currency other than the
functional currency, are recognized in current operations and have not been significant to the Company’s
operating results in any period.
Advertising and Market Development—Advertising production costs are expensed when the initial
advertisement is run. Costs of print advertising are expensed as the services are received.
Share-Based Payments—Effective July 1, 2005, the Company adopted SFAS No. 123(R), Share-Based
Payment and Staff Accounting Bulletin No. 107, Share-Based Payment, using the modified prospective application
method to account for its share-based compensation plans. On November 10, 2005, the FASB issued FASB Staff
Position No. FAS 123(R)-3—Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, which the Company has elected to adopt. This allows the Company to use the alternative transition method
provided for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R).
Under this transition method, compensation cost in 2006 and 2005 includes the portion of options and awards
vesting in the period for (1) all share-based payments granted prior to but not vested as of July 1, 2005, based on
the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for
Stock-Based Compensation and (2) all share-based payments granted subsequent to July 1, 2005, based on the
grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation cost for
options granted prior to July 1, 2005 is recognized on an accelerated amortization method over the vesting period
of the options using an estimated forfeiture rate. Compensation cost for options granted on or after July 1, 2005 is
recognized on a straight-line basis over the vesting period using an estimated forfeiture rate.
Upon adoption, the Company began expensing options as compensation and benefits with a one-time
pre-tax credit of $2.8 million in cumulative effect of accounting change related to estimated forfeitures on
restricted stock awards. Results for prior periods have not been restated. Prior to July 1, 2005, the Company
accounted for its employee stock options and awards under Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations, and accordingly, did not record
compensation costs for option grants to employees if the exercise price equaled the fair market value on the grant
date. Additionally, for restricted stock awards, compensation was recorded on a straight-line basis over the
vesting period of the awards with forfeitures recorded as they occurred.
The following table illustrates the effect on the Company’s reported net income and net income per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation in periods prior to July 1, 2005 (dollars in thousands, except per share amounts):
Year Ended December 31,
2005 2004
Net income, as reported $430,412 $380,483
Add back: Stock-based employee compensation expense, net of tax included in reported
net income, net of tax 11,356 3,081
Deduct: Total stock-based employee compensation expense determined under fair value-
based method for all awards, net of tax (18,733) (22,640)
Pro forma net income $423,035 $360,924
Income per share:
Basic—as reported $ 1.16 $ 1.04
Basic—pro forma $ 1.14 $ 0.98
Diluted—as reported $ 1.12 $ 0.99
Diluted—pro forma $ 1.10 $ 0.94
The underlying assumptions to these fair value calculations are discussed in Note 22—Employee
Share-Based Payments and Other Benefits.
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