Morgan Stanley 2009 Annual Report Download - page 130

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
changes in the counterparty’s credit spreads is considered when measuring the fair value of assets. For OTC
derivatives, the impact of changes in both the Company’s and the counterparty’s credit standing is considered
when measuring fair value. In determining the expected exposure, the Company considers collateral held and
legally enforceable master netting agreements that mitigate the Company’s exposure to each counterparty. All
valuation adjustments are subject to judgment, are applied on a consistent basis and are based upon observable
inputs where available. The Company generally subjects all valuations and models to a review process initially
and on a periodic basis thereafter.
Fair value is a market-based measure considered from the perspective of a market participant rather than an
entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own
assumptions are set to reflect those that the Company believes market participants would use in pricing the asset
or liability at the measurement date.
See Note 4 for a description of valuation techniques applied to the major categories of financial instruments
measured at fair value.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. Certain of the Company’s assets are
measured at fair value on a non-recurring basis. The Company incurs impairment charges for any writedowns of
these assets to fair value. A downturn in market conditions could result in impairment charges in future periods.
For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using
various valuation approaches. The same hierarchy as described above, which maximizes the use of observable
inputs and minimizes the use of unobservable inputs, by generally requiring that the observable inputs be used
when available, is used in measuring fair value for these items.
For further information on financial assets and liabilities that are measured at fair value on a recurring and
non-recurring basis, see Note 4.
Hedge Accounting.
The Company applies hedge accounting using various derivative financial instruments and non-U.S. dollar-
denominated debt used to hedge interest rate and foreign exchange risk arising from assets and liabilities not held
at fair value as part of asset and liability management. These derivative financial instruments are included within
Financial instruments owned—derivative and other contracts or Financial instruments sold, not yet purchased—
derivative and other contracts in the consolidated statements of financial condition.
The Company’s hedges are designated and qualify for accounting purposes as one of the following types of
hedges: hedges of changes in fair value of assets and liabilities due to the risk being hedged (fair value hedges),
and hedges of net investments in foreign operations whose functional currency is different from the reporting
currency of the parent company (net investment hedges).
For further information on derivative instruments and hedging activities, see Note 10.
Consolidated Statements of Cash Flows.
For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of Cash and due
from banks and Interest bearing deposits with banks, which are highly liquid investments with original maturities
of three months or less and readily convertible to known amounts of cash. The Company’s significant non-cash
activities include assets acquired of $11.0 billion and assumed liabilities, in connection with business
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