eTrade 2008 Annual Report Download - page 103

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 secured borrowings for financial
statement purposes and the obligations to repurchase securities sold are reflected as such in the consolidated
balance sheet.
Customer Payables—Customer payables to customers and non-customers represent credit balances in
customer accounts arising from deposits of funds and sales of securities and other funds pending completion of
securities transactions. The Company pays interest on certain customer payables balances.
Mandatory Convertible Debt—The Company accounted 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 were 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 was amortized to
corporate interest expense over the life of the debt using the interest method. In 2008, the Company retired the
entire $450 million principal amount of the mandatory convertible notes with the issuance of 25 million shares of
common stock at $18 per share (the mandatory conversion price).
Foreign Currency Translation—Assets and liabilities of consolidated subsidiaries whose functional
currency is not the U.S. dollar 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 weighted 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 accumulated other comprehensive loss for
subsidiaries whose functional currency is their local currency. 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.
Comprehensive Income (Loss)—The Company’s comprehensive income (loss) is comprised of net income
(loss), foreign currency translation gains (losses), unrealized gains (losses) on available-for-sale securities and
the effective portion of the unrealized gains (losses) on financial derivatives in cash flow hedge relationships, net
of reclassification adjustments and related tax.
Earnings (Loss) Per Share—Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted-average common shares outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
Financial Derivative Instruments and Hedging Activities—The Company enters into derivative transactions
to hedge against the risk of market price or interest rate movements on the value of certain assets, liabilities and
future cash flows. The Company must also recognize certain contracts and commitments as derivatives, whether
freestanding or embedded, when the characteristics of those contracts and commitments meet the definition of a
derivative promulgated by SFAS No. 133,as amended.
Each derivative is recorded on the balance sheet at fair value as a freestanding asset or liability. Financial
derivative instruments in hedging relationships that mitigate exposure to changes in the fair value of assets or
liabilities are considered fair value hedges under SFAS No. 133, as amended. Financial derivative instruments
designated in hedging relationships that mitigate the exposure to the variability in expected future cash flows or
other forecasted transactions are considered cash flow hedges. The Company formally documents at inception all
relationships between hedging instruments and hedged items and the risk management objective and strategy for
each hedge transaction. For financial statement purposes, the Company’s policy is to not offset fair value
amounts recognized for derivative instruments and fair value amounts related to collateral arrangements under
master netting arrangements.
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