eTrade 2008 Annual Report Download - page 105

reported in the balance sheet line item trading securities, at a fair value of $371.4 million, as of January 1, 2008.
Realized and unrealized gains and losses on securities classified as trading are included in the gain (loss) on loans
and securities, net line item. The Company liquidated its investment in preferred stock during the year ended
December 31, 2008, which resulted in a pre-tax loss of $153.8 million, net of hedges.
Operating Interest Income—Operating interest income is recognized as earned primarily through holding
credit balances, including margin, real estate and consumer loans. Other interest-earning assets include mortgage-
backed and investment securities, stock borrow balances and cash and equivalents, including cash required to be
segregated under regulatory guidelines. Operating interest income includes the impact of effective hedges on
interest-earning assets.
Operating Interest Expense—Operating interest expense is recognized as incurred primarily through holding
customer cash and deposits. Other interest-bearing liabilities include repurchase agreements and other
borrowings, FHLB advances and stock loan balances. Operating interest expense includes the impact of effective
hedges on interest-bearing liabilities.
Commission—Commission revenue is derived primarily from the Company’s retail customers and is
impacted by both trade types and the mix between the Company’s domestic and international businesses.
Commission revenue from securities transactions are recognized on a trade date basis.
Fees and Service Charges—Fees and service charges consist of account maintenance fees, payments for
order flow, foreign exchange margin revenue, 12b-1 fees, fixed income product revenue and advisor management
fee revenue. Account maintenance fees are charges to the customer either quarterly or annually and are accrued
as earned. Payments for order flow are accrued in the same period in which the related securities transactions are
completed or related services are rendered.
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 (Loss) on Loans and Securities, Net—Gain (loss) on loans and securities, net includes gains or losses
resulting from the sale or impairment of available-for-sale securities; gains or losses on trading securities; gains
or losses resulting from sales of loans; hedge ineffectiveness; 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 recognized when the related loans are sold.
Gains or losses resulting from the sale of available-for-sale securities are recognized at the trade date, based on
the difference between the anticipated proceeds and the amortized cost of the specific securities sold.
Other Revenue—Other revenue primarily consists of stock plan administration services, other revenue
ancillary to the Company’s retail customer transactions and income from the cash surrender value of BOLI.
Stock plan administration services are recognized in accordance with applicable accounting guidance, including
SOP 97-2, Software Revenue Recognition.
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—The Company records share-based payment expense in accordance with SFAS
No. 123(R) and Staff Accounting Bulletin No. 107, Share-Based Payment. SFAS No. 123(R) requires that the
Company record compensation cost at the grant date fair value of a share-based payment award over the vesting
period less estimated forfeitures. The underlying assumptions to these fair value calculations are discussed in
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