JP Morgan Chase 2008 Annual Report Download - page 156

Notes to consolidated financial statements
154 JPMorgan Chase & Co./ 2008 Annual Report
SFAS 157 Transition
In connection with the initial adoption of SFAS 157, the Firm
recorded the following on January 1, 2007:
• a cumulative effect increase to retained earnings of $287 mil-
lion, primarily related to the release of profit previously deferred
in accordance with EITF 02-3;
• an increase to pretax income of $166 million ($103 million
after-tax) related to the incorporation of the Firm’s creditworthi-
ness in the valuation of liabilities recorded at fair value; and
• an increase to pretax income of $464 million ($288 million
after-tax) related to valuations of nonpublic private equity
investments.
Prior to the adoption of SFAS 157, the Firm applied the provisions
of EITF 02-3 to its derivative portfolio. EITF 02-3 precluded the
recognition of initial trading profit in the absence of: (a) quoted
market prices, (b) observable prices of other current market transac-
tions or (c) other observable data supporting a valuation technique.
In accordance with EITF 02-3, the Firm recognized the deferred
profit in principal transactions revenue on a systematic basis (typi-
cally straight-line amortization over the life of the instruments) and
when observable market data became available.
Prior to the adoption of SFAS 157 the Firm did not incorporate an
adjustment into the valuation of liabilities carried at fair value on
the Consolidated Balance Sheets. Commencing January 1, 2007, in
accordance with the requirements of SFAS 157, an adjustment was
made to the valuation of liabilities measured at fair value to reflect
the credit quality of the Firm.
Prior to the adoption of SFAS 157, privately held investments were
initially valued based upon cost. The carrying values of privately
held investments were adjusted from cost to reflect both positive
and negative changes evidenced by financing events with third-
party capital providers. The investments were also subject to ongo-
ing impairment reviews by private equity senior investment profes-
sionals. The increase in pretax income related to nonpublic private
equity investments in connection with the adoption of SFAS 157
was due to there being sufficient market evidence to support an
increase in fair values using the SFAS 157 methodology, although
there had not been an actual third-party market transaction related
to such investments.
Financial disclosures required by SFAS 107
Many but not all of the financial instruments held by the Firm are
recorded at fair value on the Consolidated Balance Sheets. SFAS
107 requires disclosure of the estimated fair value of certain finan-
cial instruments and the methods and significant assumptions used
to estimate their fair value. Financial instruments within the scope
of SFAS 107 are included in the table below. Additionally, certain
financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures
required by SFAS 107 provide only a partial estimate of the fair
value of JPMorgan Chase. For example, the Firm has developed
long-term relationships with its customers through its deposit base
and credit card accounts, commonly referred to as core deposit
intangibles and credit card relationships. In the opinion of manage-
ment, these items, in the aggregate, add significant value to
JPMorgan Chase, but their fair value is not disclosed in this Note.
Financial instruments for which fair value approximates
carrying value
Certain financial instruments that are not carried at fair value on the
Consolidated Balance Sheets are carried at amounts that approxi-
mate fair value due to their short-term nature and generally negligi-
ble credit risk. These instruments include cash and due from banks,
deposits with banks, federal funds sold and securities purchased
under resale agreements and securities borrowed with short-dated
maturities, short-term receivables and accrued interest receivable,
commercial paper, federal funds purchased and securities loaned or
sold under repurchase agreements with short-dated maturities, other
borrowed funds (excluding advances from Federal Home Loan
Banks), accounts payable and accrued liabilities. In addition, 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.