eTrade 2008 Annual Report Download - page 100

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 and 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 $2.7 billion and $54.2 million at December 31,
2008 and 2007, 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 the Company’s brokerage
subsidiaries, are required to be segregated for the exclusive benefit of the Company’s brokerage customers.
Trading Securities—Trading securities are bought and held principally for the purpose of selling them in the
near term and are carried at estimated fair value. Realized and unrealized gains and losses on securities classified
as trading held by the Bank are included in the gain (loss) of loans and securities, net line item and are derived
using the specific identification 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
securities, 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, 2008 or 2007.
Available-for-sale securities consist of mortgage-backed securities, corporate bonds, municipal bonds,
publicly traded equity securities and other debt securities. Securities classified as available-for-sale are carried at
fair value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive
loss, net of tax. As of January 1, 2008, the Company adopted SFAS No. 157 for the fair value measurement of
available-for-sale mortgage-backed and investment securities. Realized and unrealized gains or losses on
available-for-sale securities, except for publicly traded equity securities, are computed using the specific
identification method. Amortization or accretion of premiums and discounts are recognized in interest income
using the interest method over the life of the security. Realized gains and losses and declines in fair value judged
to be other-than-temporary are included in gain (loss) on loans and securities, net; other amounts relating to
corporate investments are included in gain (loss) on sales of investments, net line item in the consolidated
statement of income (loss). Interest earned is included in operating interest income for banking and balance sheet
management operations or corporate interest income for corporate investments.
Available-for-sale securities that have an unrealized loss are evaluated for impairment in accordance with
SFAS No. 115. Management uses judgment to estimate the future cash flows associated with each security held
at a loss and to assess the probability of collecting those cash flows. Management uses a qualitative and
quantitative risk approach to evaluate each security held at a loss, which includes assessing underlying collateral
characteristics to determine if there has been an adverse change in the amount or timing of the estimated future
cash flows, which would indicate other-than-temporary impairment. The Company recognizes an impairment
charge by writing the amortized cost basis of the security down to its fair market value when the Company
believes that there has been a probable adverse change in the estimated future cash flows of the security. When it
is determined that a security has other-than-temporary impairment, the Company recognizes an impairment
charge in the gain (loss) on loans and securities, net line item in the consolidated statement of income (loss).
Subsequent to the sale of the asset-backed securities portfolio in 2007, the Company no longer holds a significant
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