eTrade 2010 Annual Report Download - page 78

and terminated hedges. Amounts are then included in net operating interest income as a yield adjustment in the
same period the hedged forecasted transaction affects earnings. The ineffective portion of the changes in fair
value of the derivative instrument in a cash flow hedge is reported in the gains (losses) on loans and securities,
net line item in the consolidated statement of loss.
Cash flow hedge relationships are treated as effective hedges as long as the future issuances of liabilities
remain probable and the hedges continue to meet the requirements of derivatives and hedging accounting
guidance. 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 immediately
reclassified into the gains (losses) on loans and securities, net line item in the consolidated statement of loss. As
of December 31, 2010, we had an unrealized pre-tax loss reported in accumulated other comprehensive loss of
$494.1 million related to cash flow hedges.
Judgments
The future issuances of liabilities in cash flow hedge relationships, including repurchase agreements, are
largely dependent on the market demand and liquidity in the wholesale borrowings market. As of December 31,
2010, we believe the forecasted issuance of all liabilities in cash flow hedge relationships is probable. However,
unexpected changes in market conditions in future periods could impact our ability to issue these liabilities. We
believe the forecasted issuance of liabilities 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 no longer meet the effectiveness criterion 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. For example, if we determined that the forecasted
issuance of repurchase agreements associated with our cash flow hedges was no longer probable, the $424.5
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 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 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, 2010 we had net deferred
tax assets of $1.5 billion, net of a valuation allowance (on state and foreign country deferred tax assets) of
$76.0 million.
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