eTrade 2006 Annual Report Download - page 92

accounting hedges are recognized as gain on sales of loans and securities, net in the consolidated statement of
income as these derivatives do not qualify for hedge accounting under SFAS No. 133, as amended. If a financial
derivative ceases to be highly effective as a hedge, hedge accounting is discontinued prospectively and the
financial derivative instrument continues to be recorded at fair value with changes in fair value being reported in
the gain on sales of loans and securities, net line item in the consolidated statement of income.
Revenue Recognition
Operating Interest Income—Operating interest income is recognized as earned on interest-earning assets,
customer margin receivable balances, stock borrow balances, cash required to be segregated under regulatory
guidelines and fees on customer assets invested in money market funds. Operating interest income includes the
effect of hedges on interest-earning assets.
Operating Interest Expense—Operating interest expense is recognized as incurred on interest-bearing
liabilities, customer credit balances, interest paid to banks and interest paid to other broker-dealers through a
subsidiary’s stock loan program. Operating interest expense includes the effect of hedges on interest-bearing
liabilities.
Commission—The Company derives commission revenue from its retail and institutional customers.
Commission revenue from securities transactions are recognized on a trade date basis. The Company receives
commissions for providing certain institutional customers with market research and other information, which is a
common industry practice. This type of commission revenue contributed less than 10% of the Company’s net
revenues for all periods presented. Direct costs from these arrangements are expensed as the commissions are
received, in proportion to the cost of the total arrangement. As a result, payments for independent research are
deferred or accrued to properly match expenses at the time commission revenue is earned. For these
arrangements, payments for independent research of $5.2 million were deferred and costs of $16.6 million were
accrued at December 31, 2006 and payments of $6.0 million were deferred and costs of $19.4 million were
accrued at December 31, 2005.
Service Charges and Fees—Service charges and fees consist of account maintenance fees, servicing fee
income and other customer service fees. Account maintenance fees are charged to the customer either quarterly
or annually and are accrued as earned.
Principal Transactions—Principal transactions consist primarily of revenue from market-making activities.
Market-making activities are the matching of buyers and sellers of securities and include transactions where the
Company will purchase securities for its balance sheet with the intention of resale to transact the customer’s buy
or sell order.
Gain on Sales of Loans and Securities, Net—Gain on sales of originated loans are recognized at the date of
settlement and are based on the difference between the cash received and the carrying value of the related loans
sold, less related transaction costs. In cases where the Company retains the servicing rights associated with loans
sold, the gain recognized is the difference between cash received and the allocated basis of the loans sold, less
the related transaction costs. In accordance with SFAS No. 140, the allocated basis of the loans, which is
determined at the sale date, is the result of the allocation of basis between the loans sold and the associated
servicing right, based on the relative fair values of the loans at the date of transfer.
Gain on sales of loans and securities, net includes gains or losses resulting from sales of loans purchased for
resale; the sale or impairment of available-for-sale mortgage-backed and investment securities; and gains or
losses on financial derivatives that are not accounted for as hedging instruments under SFAS No. 133, as
amended. Gains or losses resulting from the sale of loans are recognized at the date of settlement and are based
on the difference between the cash received and the carrying value of the related loans, less related transaction
costs. Nonrefundable fees and direct costs associated with the origination of mortgage loans are deferred and
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