JP Morgan Chase 2006 Annual Report Download - page 141

JPMorgan Chase & Co. / 2006 Annual Report 139
Note 33 – Business segments
JPMorgan Chase is organized into six major reportable business segments —
Investment Bank, Retail Financial Services, Card Services, Commercial Banking
(“CB”), Treasury & Securities Services and Asset Management, as well as a
Corporate segment. The segments are based upon the products and services
provided or the type of customer served, and they reflect the manner in which
financial information is currently evaluated by management. Results of these
lines of business are presented on a managed basis. For a definition of man-
aged basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP
financial measures, on pages 32–33 of this Annual Report. For a further discus-
sion concerning JPMorgan Chase’s business segments, see Business segment
results on pages 34–35 of this Annual Report.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial dis-
closures to reflect more closely the manner in which the Firm’s business seg-
ments are managed and to provide improved comparability with competitors.
These financial disclosure revisions are reflected in this Annual Report, and the
financial information for prior periods has been revised to reflect the disclosure
changes as if they had been in effect throughout all periods reported. A sum-
mary of the changes are described below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and materi-
al litigation reserve charges and recoveries from reported results has been
eliminated. These items had been excluded previously from operating results
because they were deemed nonrecurring; they are now included in the
Corporate business segment’s results. In addition, trading-related net interest
income is no longer reclassified from Net interest income to trading revenue.
As a result of these changes, effective January 1, 2006, management has dis-
continued reporting on an “operating” basis.
Business Segment Disclosures
Various wholesale banking clients, together with the related balance sheet
and income statement items, were transferred among CB, IB and TSS.
The primary client transfer was corporate mortgage finance from CB to
IB and TSS.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating cap-
ital (i.e., equity) to the business segments. As a result of this refinement, RFS,
CS, CB, TSS and AM have higher amounts of capital allocated to them, com-
mencing in the first quarter of 2006. The revised methodology considers for
each line of business, among other things, goodwill associated with such busi-
ness segment’s acquisitions since the Merger. In management’s view, the revised
methodology assigns responsibility to the lines of business to generate returns
on the amount of capital supporting acquisition-related goodwill. As part of this
refinement in the capital allocation methodology, the Firm assigned to the
Corporate segment an amount of equity capital equal to the then-current book
value of goodwill from and prior to the Merger. As prior periods have not been
revised to reflect the new capital allocations, capital allocated to the respective
lines of business for 2006 is not comparable to prior periods and certain busi-
ness metrics, such as ROE, are not comparable to the current presentation. The
Firm may revise its equity capital allocation methodology again in the future.
Discontinued operations
As a result of the transaction with The Bank of New York, selected corporate
trust businesses have been transferred from TSS to the Corporate segment
and reported in discontinued operations for all periods reported.