eTrade 2009 Annual Report Download - page 108

The Company reports corporate interest income and corporate interest expense separately from operating
interest income and operating interest expense. The Company believes reporting these two items separately
provides a clearer picture of the financial performance of the Company’s operations than would a presentation
that combined these two items. Operating interest income and operating interest expense is generated from the
operations of the Company. Corporate debt, which is the primary source of the corporate interest expense, has
been issued primarily in connection with recapitalization transactions and past acquisitions, such as Harrisdirect
and BrownCo.
Similarly, the Company reports gains (losses) on sales of investments, net separately from gains (losses) on
loans and securities, net. The Company believes reporting these two items separately provides a clearer picture of
the financial performance of its operations than would a presentation that combined these two items. Gains
(losses) on loans and securities, net are the result of activities in the Company’s operations, namely its balance
sheet management segment. Gains (losses) on sales of investments, net relate to historical equity investments of
the Company at the corporate level and are not related to the ongoing business of the Company’s operating
subsidiaries.
Use of Estimates—The consolidated financial statements were prepared in accordance with GAAP, which
require management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related notes for the periods presented. Actual results could differ from management’s
estimates. Material estimates in which management believes near-term changes could reasonably occur include
allowance for loan losses; fair value measurements; classification and valuation of certain investments;
accounting for derivative instruments; estimates of effective tax rates, deferred taxes and valuation allowances;
valuation of goodwill and other intangibles; and valuation and expensing of share-based payments.
Debt Exchange—In the third quarter of 2009, the Company exchanged $1.7 billion aggregate principal
amount of its 12
1
⁄ 2 % Notes and 8% Notes for an equal principal amount of newly-issued non-interest-bearing
convertible debentures(1). The Debt Exchange was accounted for as a debt extinguishment at fair value with the
resulting loss recognized in the consolidated statement of loss. The Company accounted for the Debt Exchange
as a debt extinguishment, in accordance with debt modifications and extinguishments accounting guidance,
primarily based on the Company’s assessment that the newly-issued non-interest-bearing convertible debentures
were substantially different from the debt exchanged in the transaction.
The Debt Exchange resulted in a $968.3 million pre-tax non-cash loss on extinguishment of debt during the
third quarter of 2009. The loss on the Debt Exchange resulted from the de-recognition of the debt that was
exchanged and the corresponding recognition of the newly-issued non-interest-bearing convertible debentures at
fair value. The loss consisted of two main components: 1) the difference between the fair value of the newly-
issued non-interest-bearing convertible debentures and the face amount of the exchanged debt, which resulted in
a $725.0 million premium on the new debt; and 2) the realization of the $243.3 million discount on the debt that
was exchanged. The fair value(2) of the newly-issued non-interest-bearing convertible debentures was greater than
the face amount of the debt that was exchanged primarily due to the significant increase in the Company’s stock
price from June 22, 2009, the date on which the conversion price was established, to August 25, 2009, the date on
which the Debt Exchange was consummated. The time delay was due to the required shareholder approval prior
to consummation of the Debt Exchange, which occurred at a special meeting on August 19, 2009. The remaining
$243.3 million component of the loss represented an acceleration of the interest expense that otherwise would
have been recorded in future periods. Prior to the consummation of the Debt Exchange, this discount was being
accreted into interest expense over the life of the exchanged debt under the effective interest method.
(1) For further details on the newly-issued non-interest-bearing convertible debentures see Note 14—Corporate Debt.
(2) For further details on the fair value of the newly-issued non-interest-bearing convertible debentures see Note 5—Fair Value Disclosures.
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