JP Morgan Chase 2014 Annual Report Download - page 189

JPMorgan Chase & Co./2014 Annual Report 187
(c) Physical commodities inventories are generally accounted for at the lower of cost or market. “Market” is a term defined in U.S. GAAP as not exceeding fair value less costs to sell
(“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory. Therefore, market
approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the carrying value of physical
commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge
accounting relationships, see Note 6. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.
(d) Balances reflect the reduction of securities owned (long positions) by the amount of identical securities sold but not yet purchased (short positions).
(e) As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally
enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting
adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of
an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such
balances within level 3, the reduction in the level 3 derivative receivables and payables balances would be $2.5 billion and $7.6 billion at December 31, 2014 and 2013,
respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances.
(f) Private equity instruments represent investments within the Corporate line of business. The cost basis of the private equity investment portfolio totaled $6.0 billion and $8.0
billion at December 31, 2014 and 2013, respectively.
(g) Includes investments in hedge funds, private equity funds, real estate and other funds that do not have readily determinable fair values. The Firm uses net asset value per share
when measuring the fair value of these investments. At December 31, 2014 and 2013, the fair values of these investments were $1.8 billion and $3.2 billion, respectively, of
which $337 million and $899 million, respectively were classified in level 2, and $1.4 billion and $2.3 billion, respectively, in level 3.
Transfers between levels for instruments carried at fair
value on a recurring basis
For the year ended December 31, 2014 and 2013, there
were no significant transfers between levels 1 and 2.
During the year ended December 31, 2014, transfers from
level 3 to level 2 included the following:
• $4.3 billion and $4.4 billion of gross equity derivative
receivables and payables, respectively, due to increased
observability of certain equity option valuation inputs;
• $2.7 billion of trading loans, $2.6 billion of margin
loans, $2.3 billion of private equity investments, $2.0
billion of corporate debt, and $1.3 billion of long-term
debt, based on increased liquidity and price
transparency.
Transfers from level 2 into level 3 included $1.1 billion of
other borrowed funds, $1.1 billion of trading loans and
$1.0 billion of long-term debt, based on a decrease in
observability of valuation inputs and price transparency.
During the year ended December 31, 2013, transfers from
level 3 to level 2 included certain highly rated CLOs,
including $27.4 billion held in the Firm’s available-for-sale
(“AFS”) securities portfolio and $1.4 billion held in the
trading portfolio, based on increased liquidity and price
transparency; and $1.3 billion of long-term debt, largely
driven by an increase in observability of certain equity
structured notes. Transfers from level 2 to level 3 included
$1.4 billion of corporate debt securities in the trading
portfolio largely driven by a decrease in observability for
certain credit instruments.
For the year ended December 31, 2012, $113.9 billion of
settled U.S. government agency mortgage-backed securities
were transferred from level 1 to level 2. While the U.S.
government agency mortgage-backed securities market
remained highly liquid and transparent, the transfer
reflected greater market price differentiation between
settled securities based on certain underlying loan specific
factors. There were no significant transfers from level 2 to
level 1 for the year ended December 31, 2012.
For the year ended December 31, 2012, there were no
significant transfers from level 2 into level 3. For the year
ended December 31, 2012, transfers from level 3 into level
2 included $1.2 billion of derivative payables based on
increased observability of certain structured equity
derivatives; and $1.8 billion of long-term debt due to
increased observability of certain equity structured notes.
All transfers are assumed to occur at the beginning of the
quarterly reporting period in which they occur.