Morgan Stanley 1999 Annual Report Download - page 65

page 63 |99 AR
CONSUMER LOANS
Consumer loans, which consist primarily of credit card and
consumer installment loans, are reported at their principal amounts
outstanding, less applicable allowances. Interest on consumer
loans is credited to income as earned.
Interest is accrued on credit card loans until the date of
charge-off, which generally occurs at the end of the month during
which an account becomes 180 days past due, except in the case
of bankruptcies and fraudulent transactions, which are charged off
earlier. The interest portion of charged-off credit card loans is writ-
ten off against interest revenue. Origination costs related to the
issuance of credit cards are charged to earnings over periods not
exceeding 12 months.
ALLOWANCE FOR CONSUMER LOAN LOSSES
The allowance for consumer loan losses is a significant estimate
that is regularly evaluated by management for adequacy and is
established through a charge to the provision for loan losses. The
evaluations take into consideration factors such as changes in the
nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans and current economic conditions
that may affect the borrower’s ability to pay.
The Company uses the results of these evaluations to pro-
vide an allowance for loan losses. The exposure for credit losses for
owned loans is influenced by the performance of the portfolio and
other factors discussed above, with the Company absorbing all
related losses.
SECURITIZATION OF CONSUMER LOANS
The Company periodically sells consumer loans through asset secu-
ritizations and continues to service these loans. In accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 125,
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities” (“SFAS No. 125”), the present
value of the future net servicing revenues which the Company esti-
mates that it will receive over the term of the securitized loans is
recognized in income as the loans are securitized. A corresponding
asset also is recorded and then amortized as a charge to income
over the term of the securitized loans, with actual net servicing rev-
enues continuing to be recognized in income as they are earned.
The impact of recognizing the present value of estimated future net
servicing revenues as loans are securitized has not been material to
the Company’s consolidated statements of income. The exposure
for credit losses for securitized loans is limited to the Company’s
retained contingent risk, which represents the Company’s retained
interest in securitized loans and any credit enhancement provided.
FINANCIAL INSTRUMENTS USED FOR TRADING AND INVESTMENT
Financial instruments, including derivatives, used in the Company’s
trading activities are recorded at fair value, and unrealized gains and
losses are reflected in trading revenues. Interest and dividend rev-
enue and interest expense arising from financial instruments used
in trading activities are reflected in the consolidated statements of
income as interest and dividend revenue or interest expense. The
fair values of the trading positions generally are based on listed mar-
ket prices. If listed market prices are not available or if liquidating
the Company’s positions would reasonably be expected to impact
market prices, fair value is determined based on other relevant fac-
tors, including dealer price quotations and price quotations for sim-
ilar instruments traded in different markets, including markets
located in different geographic areas. Fair values for certain deriva-
tive contracts are derived from pricing models which consider cur-
rent market and contractual prices for the underlying financial
instruments or commodities, as well as time value and yield curve
or volatility factors underlying the positions. Purchases and sales of
financial instruments are recorded in the accounts on trade date.
Unrealized gains and losses arising from the Company’s dealings in
over-the-counter (“OTC”) financial instruments, including derivative
contracts related to financial instruments and commodities, are pre-
sented in the accompanying consolidated statements of financial
condition on a net-by-counterparty basis, when appropriate.
Equity securities purchased in connection with private
equity and other principal investment activities initially are carried
in the consolidated financial statements at their original costs. The
carrying value of such equity securities is adjusted when changes
in the underlying fair values are readily ascertainable, generally as