eTrade 2011 Annual Report Download - page 81

less than 1% of total assets and total liabilities, respectively, represented instruments measured at fair value on a
recurring basis. The fair value measurement accounting guidance describes the following three levels used to
classify fair value measurements:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
In determining fair value, we may use various valuation approaches, including market, income and/or cost
approaches. The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the
perspective of a market participant. Accordingly, even when market assumptions are not readily available, our
own assumptions reflect those that market participants would use in pricing the asset or liability at the
measurement date. The availability of observable inputs can vary and in certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of
the significance of a particular input to a fair value measurement requires judgment and consideration of factors
specific to the asset or liability.
Judgments
Of assets measured at fair value on a recurring basis, 91% were available-for-sale residential mortgage-
backed securities as of December 31, 2011. Our available-for-sale residential mortgage-backed securities
portfolio was composed of: 1) agency mortgage-backed securities and CMOs; and 2) non-agency CMOs. The
fair value of agency mortgage-backed securities and CMOs was determined using quoted market prices, recent
market transactions, spread data and our own trading activities for identical or similar instruments and were
categorized in Level 2 of the fair value hierarchy. Non-agency CMOs were valued using market observable data,
including recent market transactions when available. We also utilized a pricing service to corroborate the market
observability of our inputs used in the fair value measurements of non-agency CMOs. The valuations of
non-agency CMOs reflect our best estimate of what market participants would consider in pricing the financial
instruments. We consider the price transparency for these financial instruments to be a key determinant of the
degree of judgment involved in determining the fair value. The majority of non-agency CMOs were categorized
in Level 2 of the fair value hierarchy as of December 31, 2011.
Effects if Actual Results Differ
The use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value. As of December 31, 2011, less than 1% of total
assets and none of total liabilities represented instruments measured at fair value on a recurring basis categorized
as Level 3. While our recurring fair value estimates of Level 3 instruments utilized observable inputs where
available, the valuations included significant management judgment in determining the relevance and reliability
of market information considered.
Valuation of Goodwill and Other Intangibles
Description
We review goodwill and purchased intangible assets for impairment on at least an annual basis or when
events or changes indicate the carrying value may not be recoverable. Goodwill at December 31, 2011 was $1.9
billion and other intangible assets net of amortization at December 31, 2011 were $0.3 billion. Other intangible
assets have a weighted average remaining useful life of 14 years.
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