eTrade 2008 Annual Report Download - page 72

this debt. We believe the forecasted issuance of debt in the form of repurchase agreements is most susceptible to
an unexpected change in market conditions.
Effects if Actual Results Differ
If our hedging strategies were to become significantly ineffective or our assumptions about the nature and
timing of forecasted transactions were to be inaccurate, we could no longer apply hedge accounting and our
reported results would be significantly affected.
In particular, if we determined that the forecasted issuance of debt associated with our cash flow hedges was
no longer probable, the $671.3 million pre-tax loss in accumulated other comprehensive loss would be
reclassified into the gain (loss) on loans and securities, net line item in the consolidated statement of income
(loss) in the period in which this determination was made. This loss would have a material adverse effect on the
regulatory capital position at E*TRADE Bank and our results of operations.
Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowances
Description
In preparing our consolidated financial statements, we calculate our income tax expense (benefit) based on
our interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to
estimate our current tax obligations and the realizability of uncertain tax positions and to assess temporary
differences between the financial statement carrying amounts and the tax bases of assets and liabilities. These
differences result in deferred tax assets and liabilities, the net amount of which we show as other assets or other
liabilities on our consolidated balance sheet. We must also assess the likelihood that each of our deferred tax
assets will be realized. To the extent we believe that realization is not more likely than not, we establish a
valuation allowance. When we establish a valuation allowance or increase this allowance in a reporting period,
we generally record a corresponding tax expense in our consolidated statement of income (loss). Conversely, to
the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation
allowance is reversed, which generally reduces our overall income tax expense. At December 31, 2008 we had
net deferred tax assets of $1.0 billion, net of a valuation allowance (on state and foreign country deferred tax
assets) of $127.7 million. At December 31, 2007 we had net deferred tax assets of $550.2 million, net of a
valuation allowance (on state and foreign country deferred tax assets) of $91.8 million.
Judgments
Management must make significant judgments to determine our provision for income tax expense (benefit),
our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax
assets. Changes in our estimate of these taxes occur periodically due to changes in the tax rates, changes in our
business operations, implementation of tax planning strategies, the expiration of relevant statutes of limitations,
resolution with taxing authorities of uncertain tax positions and newly enacted statutory, judicial and regulatory
guidance. These changes in judgment as well as differences between our estimates and actual amount of taxes
ultimately due, when they occur, affect accrued taxes and can be material to our operating results for any
particular reporting period.
The most significant tax related judgment made by management was the determination of whether to
provide for a valuation allowance against our net deferred tax assets. During the year ended December 31, 2008
we did not provide for a valuation allowance against our federal deferred tax assets. We are required to establish
a valuation allowance for deferred tax assets and record a charge to income if we determine, based on available
evidence at the time the determination is made, that it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
We did not establish a valuation allowance against our federal deferred tax assets as of December 31, 2008
as we believe that it is more likely than not that all of these assets will be realized. Our evaluation focused on
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