JP Morgan Chase 2005 Annual Report Download - page 130

Notes to consolidated financial statements
JPMorgan Chase & Co.
128 JPMorgan Chase & Co. /2005 Annual Report
• The fair value of loans in the held-for-sale and trading portfolios is generally
based upon observable market prices and upon prices of similar instruments,
including bonds, credit derivatives and loans with similar characteristics. If
market prices are not available, the fair value is based upon the estimated cash
flows adjusted for credit risk; that risk is discounted, using a rate appropriate
for each maturity that incorporates the effects of interest rate changes.
Other assets
Commodities inventory is carried at the lower of cost or fair value. For the
majority of commodities inventory, fair value is determined by reference to
prices in highly active and liquid markets.The fair value for other commodities
inventory is determined primarily using pricing and other data derived from
less liquid and developing markets where the underlying commodities are
traded. This caption also includes private equity investments and MSRs. For a
discussion of the fair value methodology for private equity investments, see
Note 9 on page 105 of this Annual Report.
For a discussion of the fair value methodology for MSRs, see Note 15 on
pages 114–116 of this Annual Report.
Financial liabilities
Liabilities for which fair value approximates carrying value
SFAS 107 requires that the fair value for deposit liabilities with no stated
maturity (i.e., demand, savings and certain money market deposits) be equal
to their carrying value. SFAS 107 does not allow for the recognition of the
inherent funding value of these instruments.
Fair value of commercial paper, other borrowed funds, accounts payable and
accrued liabilities is considered to approximate their respective carrying values
due to their short-term nature.
Interest-bearing deposits
Fair values of interest-bearing deposits are estimated by discounting cash
flows based upon the remaining contractual maturities of funds having simi-
lar interest rates and similar maturities.
Federal funds purchased and securities sold under repurchase
agreements
Federal funds purchased and securities sold under repurchase agreements
are typically short-term in nature; as such, for a significant majority of these
transactions, cost approximates carrying value.This balance sheet item also
includes structured repurchase agreements and similar products with long-dated
maturities. To estimate the fair value of these instruments, the cash flows are
discounted using the appropriate market rates for the applicable maturity.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs (“beneficial interests”) are
generally short-term in nature and, as such, for a significant majority of the
Firm’s transactions, cost approximates carrying value. The Consolidated
balance sheets also include beneficial interests with long-dated maturities.
The fair value of these instruments is based upon current market rates.
Long-term debt-related instruments
Fair value for long-term debt, including the junior subordinated deferrable interest
debentures held by trusts that issued guaranteed capital debt securities, is based
upon current market rates and is adjusted for JPMorgan Chase’s credit quality.
Lending-related commitments
Although there is no liquid secondary market for wholesale commitments, the
Firm estimates the fair value of its wholesale lending-related commitments
primarily using the cost of credit derivatives (which is adjusted to account
for the difference in recovery rates between bonds, upon which the cost of
credit derivatives is based, and loans) and loan equivalents (which represent
the portion of an unused commitment expected, based upon the Firm’s
average portfolio historical experience, to become outstanding in the event an
obligor defaults). The Firm estimates the fair value of its consumer commitments
to extend credit based upon the primary market prices to originate new
commitments. It is the change in current primary market prices that provides
the estimate of the fair value of these commitments. On this basis, at
December 31, 2005, the estimated fair value of the Firm’s lending-related
commitments was a liability of $0.5 billion, compared with $0.1 billion at
December 31, 2004.
The following table presents the carrying value and estimated fair value of financial assets and liabilities valued under SFAS 107; accordingly, certain assets and
liabilities that are not considered financial instruments are excluded from the table.
2005 2004
Carrying Estimated Appreciation/ Carrying Estimated Appreciation/
December 31, (in billions) value fair value (depreciation) value fair value (depreciation)
Financial assets
Assets for which fair value approximates carrying value $ 155.4 $ 155.4 $ — $ 125.7 $ 125.7 $ —
Federal funds sold and securities purchased under resale agreements 134.0 134.3 0.3 101.4 101.3 (0.1)
Trading assets 298.4 298.4 — 288.8 288.8 —
Securities 47.6 47.6 — 94.5 94.5 —
Loans: Wholesale, net of allowance for loan losses 147.7 150.2 2.5 132.0 134.6 2.6
Consumer, net of allowance for loan losses 264.4 262.7 (1.7) 262.8 262.5 (0.3)
Interests in purchased receivables 29.7 29.7 — 31.7 31.8 0.1
Other assets 53.4 54.7 1.3 50.4 51.1 0.7
Total financial assets $ 1,130.6 $ 1,133.0 $ 2.4 $ 1,087.3 $ 1,090.3 $ 3.0
Financial liabilities
Liabilities for which fair value approximates carrying value $ 241.0 $ 241.0 $ — $ 228.8 $ 228.8 $ —
Interest-bearing deposits 411.9 411.7 0.2 385.3 385.5 (0.2)
Federal funds purchased and securities sold under repurchase agreements 125.9 125.9 — 127.8 127.8 —
Trading liabilities 145.9 145.9 — 151.2 151.2 —
Beneficial interests issued by consolidated VIEs 42.2 42.1 0.1 48.1 48.0 0.1
Long-term debt-related instruments 119.9 120.6 (0.7) 105.7 107.7 (2.0)
Total financial liabilities $ 1,086.8 $ 1,087.2 $ (0.4) $ 1,046.9 $ 1,049.0 $ (2.1)
Net appreciation $ 2.0 $0.9