Morgan Stanley 2009 Annual Report Download - page 132

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effective October 13, 2008, as a result of the adjustment to Equity Units sold to a wholly owned subsidiary of
China Investment Corporation Ltd. (“CIC”) (see Note 13), the Company calculates EPS in accordance with
accounting guidance for determining EPS for participating securities. The accounting guidance for participating
securities and the two-class method of calculating EPS addresses the computation of EPS by companies that have
issued securities other than common stock that contractually entitle the holder to participate in dividends and
earnings of the company along with common shareholders according to a predetermined formula. The two-class
method requires the Company to present EPS as if all of the earnings for the period are distributed to Morgan
Stanley common shareholders and any participating securities, regardless of whether any actual dividends or
distributions are made. The amount allocated to the participating securities is based upon the contractual terms of
their respective contract and is reflected as a reduction to “Net income applicable to Morgan Stanley common
shareholders” for both the Company’s basic and diluted EPS calculations (see Note 14). The two-class method
does not impact the Company’s actual net income applicable to Morgan Stanley or other financial results. Unless
contractually required by the terms of the participating securities, no losses are allocated to participating
securities for purposes of the EPS calculation under the two-class method.
In June 2008, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance on whether
share-based payment transactions are participating securities. This accounting guidance addresses whether
instruments granted in share-based payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing EPS under the two-class method as
described in the accounting guidance for calculating EPS. Under this accounting guidance, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid)
are participating securities and shall be included in the computation of EPS pursuant to the two-class method.
The accounting guidance on whether share-based payment transactions are participating securities became
effective for the Company on January 1, 2009. All prior-period EPS data presented were adjusted retrospectively.
Stock-Based Compensation.
The Company accounts for stock-based compensation in accordance with the accounting guidance for equity-
based awards. This accounting guidance requires measurement of compensation cost for equity-based awards at
fair value and recognition of compensation cost over the service period, net of estimated forfeitures. The
Company determines the fair value of restricted stock units based on the number of units granted and the grant
date fair value of the Company’s common stock, measured as the volume-weighted average price on the date of
grant. The fair value of stock options is determined using the Black-Scholes valuation model and the single grant
life method. Under the single grant life method, option awards with graded vesting are valued using a single
weighted-average expected option life. Compensation expense for stock-based payment awards is recognized
using the graded vesting attribution method. Until its discontinuation on June 1, 2009, the Company’s Employee
Stock Purchase Plan (the “ESPP”) allowed employees to purchase shares of the Company’s common stock at a
15% discount from market value. The Company expensed the 15% discount associated with the ESPP until its
discontinuation.
For stock-based awards issued prior to the adoption of current accounting guidance, the Company’s accounting
policy for awards granted to retirement-eligible employees is to recognize compensation cost over the service
period specified in the award terms. The Company accelerates any unrecognized compensation cost for such
awards if and when a retirement-eligible employee leaves the Company.
The Company recognizes the expense for equity-based awards over the requisite service period. For anticipated
year-end equity awards that are granted to employees expected to be retirement-eligible under the award terms,
the Company accrues the estimated cost of these awards over the course of the current fiscal year. As such, the
Company accrued the estimated cost of 2009 year-end awards granted to employees who were retirement-
eligible under the award terms over 2009 rather than expensing the awards on the date of grant (which occurred
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