JP Morgan Chase 2009 Annual Report Download - page 192

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 190
Fair value measurement of the plans’ assets and liabilities
The following details the instruments measured at fair value, in-
cluding the general classification of such instruments pursuant to
the valuation hierarchy, as described in Note 3 on pages 156–173
of this Annual Report.
Cash and cash equivalents
Cash and cash equivalents includes currency on hand, demand
deposits with banks or other financial institutions, and any short-
term, highly liquid investments readily convertible into cash (i.e.,
investments with original maturities of three months or less). Due
to the highly liquid nature of these assets they are classified within
level 1 of the valuation hierarchy.
Equity securities
Common and preferred stocks are valued at the closing price re-
ported on the major stock exchange on which the individual securi-
ties are traded and are generally classified within level 1 of the
valuation hierarchy.
Common/collective trust funds
These investments are public investment fund vehicles valued based
on the quoted NAV, and they are generally classified within level 2
of the valuation hierarchy.
Limited partnerships
Limited partnerships include investments in hedge funds, private
equity funds and real estate funds. Hedge funds are valued based
on quoted NAV and are classified within level 2 or 3 of the valua-
tion hierarchy depending on the level of liquidity and activity in the
markets for each investment. Certain of these investments are
subject to restrictions on redemption (such as initial lock-up peri-
ods, withdrawal limitations and illiquid assets) and are therefore
classified within level 3 of the valuation hierarchy. The valuation of
private equity investments and real estate funds require significant
management judgment due to the absence of quoted market
prices, the inherent lack of liquidity and the long-term nature of
such assets and therefore, they are generally classified within level
3 of the valuation hierarchy.
Corporate debt securities and U.S. federal, state, local and non-
government debt securities
A limited number of these investments are valued at the closing
price reported on the major exchange on which the individual
securities are traded. Where quoted prices are available in an active
market, the investments are classified within level 1 of the valua-
tion hierarchy. If quoted market prices are not available for the
specific security, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or
discounted cash flows. Such securities are generally classified
within level 2 of the valuation hierarchy.
Mortgage-backed securities
Mortgage-backed securities include both U.S. government agency
and nonagency securities. U.S. government agency securities are
valued based on quoted prices in active markets and are therefore
classified in level 1 of the valuation hierarchy. Nonagency securities
are primarily “AAA” rated residential and commercial mortgage-
based securities valued using a combination of observed transac-
tion prices, independent pricing services and relevant broker
quotes. Consideration is given to the nature of the quotes and the
relationships of recently evidenced market activity to the prices
provided from independent pricing services. Such securities are
generally classified within level 2 of the valuation hierarchy.
Derivative receivables and derivative payables
In the normal course of business, foreign exchange, credit deriva-
tive, interest rate and equity derivative contracts are used by the
plans to minimize fluctuations in the value of plan assets caused by
foreign exchange, credit, interest rate, and equity risks. These
instruments may also be used in lieu of investing in cash instru-
ments. These derivative instruments are primarily valued using
internally developed models that use as their basis readily observ-
able market parameters and are therefore classified within level 2
of the valuation hierarchy.
Other
Other consists of exchange traded funds (“ETFs”), mutual fund
investments, and participating and non-participating annuity con-
tracts (the “Annuity Contracts”). ETFs and mutual fund investments
are valued using NAV. Those fund investments with a daily NAV
that are validated by a sufficient level of observable activity (pur-
chases and sales at NAV) are classified in level 1 of the valuation
hierarchy. Where adjustments to the NAV are required, for exam-
ple, for fund investments subject to restrictions on redemption
(such as lock-up periods or withdrawal limitations), and/or observ-
able activity for the fund investment is limited, fund investments are
classified in level 2 or 3 of the valuation hierarchy. Annuity Con-
tracts are valued at the amount by which the fair value of the
assets held in the separate account exceeds the actuarially deter-
mined guaranteed benefit obligation covered under the Annuity
Contracts. Annuity Contracts lack market mechanisms for transfer-
ring each individual policy and generally include restrictions on the
timing of surrender; therefore, these investments are classified
within level 3 of the valuation hierarchy.