Morgan Stanley 2010 Annual Report Download - page 135

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Material intercompany balances and transactions have been eliminated.
Consolidation. The consolidated financial statements include the accounts of the Company, its wholly owned
subsidiaries and other entities in which the Company has a controlling financial interest, including certain
variable interest entities (“VIE”) (see Note 7). The Company adopted accounting guidance for noncontrolling
interests on January 1, 2009. Accordingly, for consolidated subsidiaries that are less than wholly owned, the
third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income
attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to
noncontrolling interests on the consolidated statements of income, and the portion of the shareholders’ equity of
such subsidiaries is presented as Noncontrolling interests in the consolidated statements of financial condition
and consolidated statements of changes in total equity.
For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activities
without additional support and (2) the equity holders bear the economic residual risks and returns of the entity and
have the power to direct the activities of the entity that most significantly affect its economic performance, the
Company consolidates those entities it controls either through a majority voting interest or otherwise. For entities
that do not meet these criteria, commonly known as VIEs, the Company consolidates those entities where the
Company has the power to make the decisions that most significantly affect the economic performance of the VIE
and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the
VIE, except for certain VIEs that are money market funds, investment companies or are entities qualifying for
accounting purposes as investment companies. Generally, the Company consolidates those entities when it absorbs
a majority of the expected losses or a majority of the expected residual returns, or both, of the entities.
Notwithstanding the above, under accounting guidance prior to January 1, 2010, certain securitization vehicles,
commonly known as qualifying special purpose entities (“QSPE”), were not consolidated by the Company if they
met certain criteria regarding the types of assets and derivatives they could hold and the range of discretion they
could exercise in connection with the assets they held. These entities are now subject to the consolidation
requirements for VIEs.
For investments in entities in which the Company does not have a controlling financial interest but has
significant influence over operating and financial decisions, the Company generally applies the equity method of
accounting with net gains and losses recorded within Other revenues. Where the Company has elected to measure
certain eligible investments at fair value in accordance with the fair value option, net gains and losses are
recorded within Principal transactions—Investments (see Note 4).
Equity and partnership interests held by entities qualifying for accounting purposes as investment companies are
carried at fair value.
The Company’s significant regulated U.S. and international subsidiaries include Morgan Stanley & Co.
Incorporated (“MS&Co.”), Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. International plc
(“MSIP”), Morgan Stanley MUFG Securities, Co., Ltd. (“MSMS”), Morgan Stanley Bank, N.A. and Morgan
Stanley Investment Advisors Inc.
Income Statement Presentation. The Company, through its subsidiaries and affiliates, provides a wide variety
of products and services to a large and diversified group of clients and customers, including corporations,
governments, financial institutions and individuals. In connection with the delivery of the various products and
services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when
assessing the performance of its businesses, primarily in its Institutional Securities business segment, the
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