N OT E S TO C O N S O L I DAT E D F I N A N C I A L STAT E M E N T S
Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2003 and 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business – The Chicago Board Options Exchange (“the Exchange”) is a registered securities exchange, subject to oversight by the Securities and Exchange Commission. The Exchange’s principal business is providing a marketplace for trading equity and index options.
Basis of Presentation – The consolidated financial statements include the accounts and results of operations of Chicago Board Options Exchange, Incorporated, and its wholly owned subsidiaries, Chicago Options Exchange Building Corporation and, beginning in 2002, CBOE, LLC. Inter-company balances and transactions are eliminated.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition – Transaction Fees revenue is considered earned upon the execution of the trade and is recognized on a trade date basis. Other Member Fees revenue is recognized during the period the service is provided. OPRA income is allocated based upon the market share of the OPRA members and is received quarterly. Estimates of OPRA’s quarterly revenue are made and accrued each month. Regulatory Fees are predominately received in the month of January and are amortized monthly to coincide with the services rendered during the fiscal year.
Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with maturities of three months or less from the date of purchase.
Investments – All investments are classified as available-for-sale and are reported at cost which approximates their fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
Accounts Receivable – Accounts receivable consist primarily of transaction, marketing and other fees receivable from The Options Clearing Corporation (“OCC”), and the Exchange’s share of distributable revenue receivable from The Options Price Reporting Authority (“OPRA”).
Investments in Affiliates – Investments in affiliates represent investments in OCC, OneChicago, (“ONE”) and The Cincinnati Stock Exchange (“CSE”). The investment in OCC (20% of its outstanding stock) is carried at cost because of the Exchange’s inability to exercise significant influence. The Exchange accounts for the investment in CSE (68% of its total certificates of proprietary membership) under the equity method due to the lack of effective control over the operating and financing activities of CSE. During 2002 the Exchange made an initial investment in ONE (approximately 40% of its outstanding stock). This investment is accounted for under the equity method.
Property and Equipment – Property and equipment are carried at cost. Depreciation on building, furniture and equipment is provided on the straight-line method. Estimated useful lives are 40 years for the building and five to ten years for furniture and equipment. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases.
Data Processing Software – Data processing software is carried at cost and amortized over five to seven years using the straight-line method commencing with the date the software is put in service.
Goodwill – SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and separately identified intangible assets with indefinite lives no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. Upon review by Exchange management, it was determined there has been no impairment of the intangible assets included in the financial statements. Goodwill is amortized over fifteen years for income tax purposes.
Income Taxes – Income taxes are determined using the liability method, under which deferred tax assets and liabilities are recorded based on differences between the financial accounting and tax bases of assets and liabilities.
Unearned Income – Unearned income represents amounts received by the Exchange for which the contracted services have not been provided.
Fair Value of Financial Instruments – SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. The carrying values of financial instruments included in assets and liabilities are reasonable estimates of their fair value.
Reclassifications – Certain prior year amounts have been reclassified to conform with the current year presentation.