Morgan Stanley 2009 Annual Report Download - page 220

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company adopted accounting guidance which clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements on December 31, 2007 and recorded a cumulative effect
adjustment of approximately $92 million as a decrease to the opening balance of Retained earnings as of
December 1, 2007.
The total amount of unrecognized tax benefits was approximately $4.1 billion and $3.5 billion as of
December 31, 2009 and December 31, 2008, respectively. Of this total, approximately $2.1 billion and $1.9
billion, respectively, (net of federal benefit of state issues, competent authority and foreign tax credit offsets)
represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax
rate in future periods.
The Company recognizes the accrual of interest related to unrecognized tax benefits in Provision for income
taxes in the consolidated statements of income. The Company recognizes the accrual of penalties (if any) related
to unrecognized tax benefits in Income before income taxes. For 2009, fiscal 2008 and the one month ended
December 31, 2008, the Company recognized $53 million, $76 million and $7 million, respectively, of interest
(net of federal and state income tax benefits) in the consolidated statements of income. Interest expense accrued
as of December 31, 2009 and December 31, 2008 was approximately $367 million and $313 million,
respectively, net of federal and state income tax benefits. The amount of penalties accrued was immaterial.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits
for 2009, fiscal 2008 and the one month ended December 31, 2008 (dollars in millions):
Unrecognized Tax Benefits
Balance at December 1, 2007 ............................................................ $2,722
Increases based on tax positions related to the current period ................................... 856
Increases based on tax positions related to prior periods ....................................... 5
Decreases based on tax positions related to prior periods ...................................... (124)
Decreases related to a lapse of applicable statute of limitations ................................. (34)
Balance at November 30, 2008 .......................................................... $3,425
Increases based on tax positions related to the current period ................................... 41
Balance at December 31, 2008 ........................................................... $3,466
Increases based on tax positions related to the current period ................................... 688
Increases based on tax positions related to prior periods ....................................... 33
Decreases based on tax positions related to prior periods ...................................... (74)
Decreases related to a lapse of applicable statute of limitations ................................. (61)
Balance at December 31, 2009 ........................................................... $4,052
The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax
authorities in certain countries, such as Japan and the U.K., and states in which the Company has significant
business operations, such as New York. During 2010, the IRS and the Japanese tax authorities are expected to
conclude the field work portion of their examinations on issues covering tax years 1999-2005 and 2007-2008,
respectively. Also during 2010, the Company expects to reach a conclusion with the U.K. tax authorities on
issues through tax year 2007, including those in appeals. Additionally, during 2010, the Company may reach a
conclusion with the New York State and New York City tax authorities on issues covering years 2002-2006. The
Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting
from these and subsequent years’ examinations. The Company has established unrecognized tax benefits that the
Company believes are adequate in relation to the potential for additional assessments. Once established, the
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