eTrade 2009 Annual Report Download - page 82

discontinued because a derivative instrument ceases to be a highly effective hedge; or is sold, terminated or
de-designated, amounts included in accumulated other comprehensive loss related to the specific hedging
instrument continue to be reported in other comprehensive income or loss until the forecasted transaction affects
earnings. If it becomes probable that a hedged forecasted transaction will not occur, amounts included in
accumulated other comprehensive loss related to the specific hedging instruments would be reclassified into the
gains (losses) on loans and securities, net line item in the consolidated statement of loss.
The future issuances of liabilities, including repurchase agreements, are largely dependent on the market
demand and liquidity in the wholesale borrowings market. As of December 31, 2009, we believe the forecasted
issuance of all debt in cash flow hedge relationships is probable. However, unexpected changes in market
conditions in future periods could impact our ability to issue 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
repurchase agreements associated with our cash flow hedges was no longer probable, the $403.4 million pre-tax
loss in accumulated other comprehensive loss related to cash flow hedges on repurchase agreements would be
reclassified into the gains (losses) on loans and securities, net line item in the consolidated statement of loss in
the period in which this determination was made. This loss would have a material adverse effect on our
regulatory capital position 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 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 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, 2009 we had net deferred tax assets of $1.4
billion, net of a valuation allowance (on state and foreign country deferred tax assets) of $107.3 million.
Judgments
Management must make significant judgments to determine our provision for income tax 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, 2009
we did not provide for a valuation allowance against our federal deferred tax assets. We are required to establish
79