Morgan Stanley 2009 Annual Report Download - page 68

Accounting Developments.
Transfers of Financial Assets and Extinguishments of Liabilities and Consolidation of Variable Interest
Entities.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that changes the
way entities account for securitizations and special-purpose entities (“SPEs”). The accounting guidance amends
the accounting for transfers of financial assets and will require additional disclosures about transfers of financial
assets, including securitization transactions, and where entities have continuing exposure to the risks related to
transferred financial assets. It eliminates the concept of a qualifying special purpose entity (“QSPE”) and changes
the requirements for derecognizing financial assets.
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.
Regulatory Outlook.
It is likely that the year 2010 and subsequent years will see material changes in the way that major financial
institutions are regulated both in the U.S. and worldwide. The reforms being discussed include several that
contemplate comprehensive restructuring of the regulation of the financial services industry. Enactment of such
measures likely would lead to stricter regulation of financial institutions generally, and heightened prudential
requirements for systemically important firms in particular. Such measures could include taxation of financial
transactions, liabilities and employee compensation as well as reforms of the OTC derivatives markets, such as
mandated exchange trading and clearing, position limits, margin, capital and registration requirements. Other
changes under discussion in the U.S. legislative arena include: breaking up firms that are considered “too big to
fail” or mandating certain barriers between their activities in order to allow for an orderly resolution of failing
financial institutions; curtailing the ability of firms that own FDIC-insured institutions to also engage in private
equity, hedge fund and proprietary trading activities; requiring firms to maintain plans for their dissolution;
requiring the financial industry to pay into a fund designed to help unwind failing firms; providing regulators
with new means of limiting activities of financial firms; regulating compensation in the financial services
industry; enhancing corporate governance, especially regarding risk management; and creating a new agency, the
“Consumer Financial Protection Agency,” to protect U.S. consumers who buy financial products.
Reforms are being discussed concurrently in Washington, London, the European Union (“EU”) and other major
market centers in which the Company operates, and attempts are being made to internationally coordinate the
principles behind such changes through the G-20’s expanded mandate for the Financial Stability Board and
through the Basel Committee on Banking Supervision (“Basel Committee”), the International Association of
Securities Commissioners and others. Among the internationally coordinated reforms are recent measures and
proposals by the Basel Committee to raise the quality of capital, increase capital requirements for securitizations,
trading book exposure and counterparty credit risk exposure, and globally introduce a leverage ratio, capital
conservation measures and liquidity coverage requirements, among other measures. In both the EU and the U.S.,
moreover, changes to the institutional framework for financial regulation are being discussed or are underway.
Many of the market reforms, if enacted, may materially affect the Company’s business, financial condition,
results of operations and cash flows for a particular future period. In particular, if systemic regulation were
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