Morgan Stanley 2009 Annual Report Download - page 136

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The accounting guidance also amends the accounting for consolidation and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights)
should be consolidated. The determination of whether a reporting entity is required to consolidate another entity
is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct
the activities of the other entity that most significantly impact the other entity’s economic performance. In
February 2010, the FASB finalized a deferral of these accounting changes, effective January 1, 2010, for certain
interests in investment companies or in entities qualifying for accounting purposes as investment companies. For
the entities included in the deferral, the Company will continue to analyze consolidation under other existing
authoritative guidance; these entities are not included in the impact noted below.
The adoption of this accounting guidance on January 1, 2010 did not have a material impact on the Company’s
consolidated statement of financial condition.
3. Morgan Stanley Smith Barney Holdings LLC.
Smith Barney. On May 31, 2009 (the “Closing Date”), the Company and Citi consummated the combination of
the Company’s Global Wealth Management Group and the businesses of Citi’s Smith Barney in the U.S., Quilter
in the U.K., and Smith Barney Australia (“Smith Barney”). In addition to the Company’s contribution of
respective businesses to MSSB, the Company paid Citi $2,755 million in cash. The combined businesses operate
as MSSB. Pursuant to the terms of the amended contribution agreement, dated as of May 29, 2009 (“amended
contribution agreement”), certain businesses of Smith Barney and Morgan Stanley will be contributed to MSSB
subsequent to May 31, 2009 (the “delayed contribution businesses”). Morgan Stanley and Citi will each own
their delayed contribution businesses until they are transferred to MSSB and gains and losses from such
businesses will be allocated to the Company’s and Citi’s respective share of MSSB’s gains and losses.
The Company owns 51% and Citi owns 49% of MSSB, with the Company having appointed four directors to the
MSSB board and Citi having appointed two directors. As part of the acquisition, the Company has the option
(i) following the third anniversary of the Closing Date to purchase a portion of Citi’s interest in MSSB
representing 14% of the total outstanding MSSB interests, (ii) following the fourth anniversary of the Closing
Date to purchase a portion of Citi’s interest in MSSB representing an additional 15% of the total outstanding
MSSB interests and (iii) following the fifth anniversary of the Closing Date to purchase the remainder of Citi’s
interest in MSSB. The Company may call all of Citi’s interest in MSSB upon a change in control of Citi. Citi
may put all of its interest in MSSB to the Company upon a change in control of the Company or following the
later of the sixth anniversary of the Closing Date and the one-year anniversary of the Company’s exercise of the
call described in clause (ii) above. The purchase price for the call and put rights described above is the fair
market value of the purchased interests determined pursuant to an appraisal process.
As of May 31, 2009, the Company included MSSB in its consolidated financial statements. The results of MSSB
are included within the Global Wealth Management Group business segment. See Note 13 for further
information on MSSB.
The Company accounted for the transaction using the acquisition method of accounting. The fair value of the total
consideration transferred to Citi amounted to approximately $6,087 million and the preliminary fair value of Citi’s
equity in MSSB was approximately $3,973 million. The acquisition method of accounting prescribes the full
goodwill method even in business combinations in which the acquirer holds less than 100% of the equity interests in
the acquiree at acquisition date. Accordingly, the full fair value of Smith Barney was allocated to the fair value of
assets acquired and liabilities assumed to derive the preliminary goodwill amount of approximately $5,210 million,
which represents synergies of combining the two businesses. The Company is still finalizing the valuation of the
intangible assets and the fair value of the Company’s contributed businesses into MSSB. When finalized, the
amount of total consideration transferred, non-controlling interest, intangible assets and acquisition-related goodwill
could change.
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