Morgan Stanley 2009 Annual Report Download - page 127

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Notwithstanding the above, under accounting guidance prior to January 1, 2010, certain securitization vehicles,
commonly known as qualifying special purpose entities (“QSPEs”), were not consolidated by the Company if
they met certain criteria regarding the types of assets and derivatives they could hold, the types of sales they
could engage in and the range of discretion they could exercise in connection with the assets they held (see
Note 6).
For investments in entities in which the Company does not have a controlling financial interest but has
significant influence over operating and financial decisions, the Company generally applies the equity method of
accounting with net gains and losses recorded within Other revenues. Where the Company has elected to measure
certain eligible investments at fair value in accordance with the fair value option, net gains and losses are
recorded within Principal transactions—investments (see Note 4).
Equity and partnership interests held by entities qualifying for accounting purposes as investment companies are
carried at fair value.
The Company’s significant regulated U.S. and international subsidiaries include Morgan Stanley & Co.
Incorporated (“MS&Co.”), Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. International plc
(“MSIP”), Morgan Stanley Japan Securities Co., Ltd. (“MSJS”), Morgan Stanley Bank, N.A. and Morgan
Stanley Investment Advisors Inc.
Income Statement Presentation. The Company, through its subsidiaries and affiliates, provides a wide variety
of products and services to a large and diversified group of clients and customers, including corporations,
governments, financial institutions and individuals. In connection with the delivery of the various products and
services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when
assessing the performance of its businesses, the Company considers its principal trading, investment banking,
commissions, and interest and dividend income, along with the associated interest expense, as one integrated
activity for each of the Company’s separate businesses.
The Company made an immaterial adjustment to eliminate $1,021 million of interest revenue and interest
expense (approximate 2.6% average decrease in each line item) on certain intercompany transactions for fiscal
2008, which had not been eliminated in error. There was no impact on net interest, net revenue or net income on
the consolidated statement of income.
2. Summary of Significant Accounting Policies.
Revenue Recognition.
Investment Banking. Underwriting revenues and advisory fees from mergers, acquisitions and restructuring
transactions are recorded when services for the transactions are determined to be substantially completed,
generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting of
legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same
period as the related investment banking transaction revenue. Underwriting revenues are presented net of related
expenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interest
expenses.
Commissions. The Company generates commissions from executing and clearing customer transactions on
stock, options and futures markets. Commission revenues are recognized in the accounts on trade date.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration
fees are recognized over the relevant contract period. Sales commissions paid by the Company in connection
with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred
commission assets. The Company periodically tests the deferred commission assets for recoverability based on
cash flows expected to be received in future periods. In certain management fee arrangements, the Company is
entitled to receive performance-based fees (also referred to as incentive fees) when the return on assets under
management exceeds certain benchmark returns or other performance targets. In such arrangements, performance
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