eTrade 2009 Annual Report Download - page 113

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 Loss—The Company’s comprehensive loss is composed of net loss, noncredit portion of
OTTI on available-for-sale debt securities, unrealized gains (losses) on available-for-sale securities, the effective
portion of the unrealized gains (losses) on derivatives in cash flow hedge relationships and foreign currency
translation gains (losses), net of reclassification adjustments and related tax.
Derivative Instruments and Hedging Activities—The Company enters into derivative transactions primarily
to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Each derivative
is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. 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.
Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge
and, if designated as a hedge, the kind hedge designation. 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. Derivative instruments in hedging relationships that mitigate
exposure to changes in the fair value of assets or liabilities are considered fair value 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. Cash flow and fair value hedge ineffectiveness is
re-measured on a quarterly basis and is included in the gains (losses) on loans and securities, net line item in the
consolidated statement of loss. The Company also recognizes certain contracts and commitments as derivatives
when the characteristics of those contracts and commitments meet the definition of a derivative. Gains and losses
on derivatives that are not held as accounting hedges are recognized in the gains (losses) on loans and securities,
net line item in the consolidated statement of loss. See Note 8—Accounting for Derivative Instruments and
Hedging Activities.
Fair Value—Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The Company determines
the fair value for its financial instruments and for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. In addition, the
Company determines the fair value for nonfinancial assets and nonfinancial liabilities on a nonrecurring basis as
required during impairment testing or other accounting guidance. See Note 5—Fair Value Disclosures.
Operating Interest Income—Operating interest income is recognized as earned through holding mortgage
related assets, primarily real estate loans and mortgage-backed securities. Other interest-earning assets include
margin receivables, investment securities, cash and equivalents, including cash and investments required to be
segregated under regulatory guidelines, and stock borrow balances. 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.
Commissions—Commissions revenue is derived primarily from the Company’s customers and is impacted
by both trade types and the mix between the Company’s domestic and international businesses. Commissions
revenue from securities transactions is recognized on a trade date basis.
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