eTrade 2011 Annual Report Download - page 111

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 by other accounting guidance. See Note 4—Fair Value Disclosures.
Operating Interest Income—Operating interest income is recognized as earned through holding interest-
earning assets, such as real estate loans, mortgage-backed securities, margin receivables, investment securities,
securities borrowed balances and cash and equivalents, including segregated cash and investments. Operating
interest income also includes the impact of the Company’s derivative transactions related to interest-earning
assets.
Operating Interest Expense—Operating interest expense is recognized as incurred primarily through holding
interest-bearing liabilities, including repurchase agreements, FHLB advances and other borrowings, customer
cash and deposits and securities loaned balances. Operating interest expense also includes the impact of the
Company’s derivative transactions related to interest-bearing liabilities.
Commissions—Commissions are derived primarily from the Company’s customers and are impacted by
both trade types and trade mix. Commissions from securities transactions are recognized on a trade-date basis.
Fees and Service Charges—Fees and service charges primarily consist of order flow revenue. Fees and
service charges also include 12b-1 fees, advisor management fee revenue, reorganization fees and foreign
exchange margin revenue. Order flow revenue is accrued in the same period in which the related securities
transactions are completed or related services are rendered.
Principal Transactions—Principal transactions consist of revenue from market making activities. Market
making activities are the matching of buyers and sellers of securities and include transactions where the
Company will purchase securities for its balance sheet with the intention of resale to transact the customer’s buy
or sell order. Principal transactions earned on the Company’s market making activities are recorded on a trade
date basis.
Gains on Loans and Securities, Net—Gains on loans and securities, net includes gains or losses resulting
from the sale of available-for-sale securities; gains or losses on trading securities; gains or losses resulting from
sales of loans; hedge ineffectiveness; and gains or losses on derivative instruments that are not accounted for as
hedging instruments. Gains or losses resulting from the sale of available-for-sale securities are generally
recognized at the trade-date, based on the difference between the anticipated proceeds and the amortized cost of
the specific securities sold.
Other-than-temporary Impairment (“OTTI”)—The Company considers OTTI for an available-for-sale or
held-to-maturity debt security to have occurred if one of the following conditions are met: the Company intends
to sell the impaired debt security; it is more likely than not that the Company will be required to sell the impaired
debt security before recovery of the security’s amortized cost basis; or the Company does not expect to recover
the entire amortized cost basis of the security. The Company’s evaluation of whether it intends to sell an
impaired debt security considers whether management has decided to sell the security as of the balance sheet
date. The Company’s evaluation of whether it is more likely than not that the Company will be required to sell an
impaired debt security before recovery of the security’s amortized cost basis considers the likelihood of sales that
involve legal, regulatory or operational requirements. For impaired debt securities that the Company does not
intend to sell and it is not more likely than not that the Company will be required to sell before recovery of the
security’s amortized cost basis, the Company uses both qualitative and quantitative valuation measures to
evaluate whether the Company expects to recover the entire amortized cost basis of the security. The Company
considers all available information relevant to the collectability of the security, including credit enhancements,
security structure, vintage, credit ratings and other relevant collateral characteristics.
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