Morgan Stanley 2010 Annual Report Download - page 136

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company considers its principal trading, investment banking, commissions and interest income, along with the
associated interest expense, as one integrated activity.
Effective January 1, 2010, the Company reclassified dividend income associated with trading and investing
activities to Principal transactions—Trading or Principal transactions—Investments depending upon the business
activity. Previously, these amounts were included in Interest and dividends on the consolidated statements of
income. These reclassifications were made in connection with the Company’s conversion to a financial holding
company. Prior periods have been adjusted to conform to the current presentation.
The Company made an immaterial adjustment to eliminate $1,021 million of interest revenue and interest
expense on certain intercompany transactions for fiscal 2008, which had not been eliminated in error. There was
no impact on net interest, net revenues or net income on the consolidated statement of income.
2. Summary of Significant Accounting Policies.
Revenue Recognition.
Investment Banking. Underwriting revenues and advisory fees from mergers, acquisitions and restructuring
transactions are recorded when services for the transactions are determined to be substantially completed,
generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting of
legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same
period as the related investment banking transaction revenues. Underwriting revenues are presented net of related
expenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interest
expenses.
Commissions. The Company generates commissions from executing and clearing customer transactions on
stock, options, bonds and futures markets. Commission revenues are recognized in the accounts on trade date.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration
fees are recognized over the relevant contract period. Sales commissions paid by the Company in connection
with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred
commission assets. The Company periodically tests the deferred commission assets for recoverability based on
cash flows expected to be received in future periods. In certain management fee arrangements, the Company is
entitled to receive performance-based fees (also referred to as incentive fees) when the return on assets under
management exceeds certain benchmark returns or other performance targets. In such arrangements, performance
fee revenue is accrued (or reversed) quarterly based on measuring account/fund performance to date versus the
performance benchmark stated in the investment management agreement. Performance-based fees are recorded
within Principal transactions—Investments or Asset management, distribution and administration fees depending
on the nature of the arrangement. The amount of performance-based fee revenue at risk of reversing if fund
performance falls below stated investment management agreement benchmarks was approximately $208 million
at December 31, 2010 and approximately $122 million at December 31, 2009.
Principal Transactions. See “Financial Instruments and Fair Value” below for principal transactions revenue
recognition discussions.
Financial Instruments and Fair Value.
A significant portion of the Company’s financial instruments is carried at fair value with changes in fair value
recognized in earnings each period. A description of the Company’s policies regarding fair value measurement
and its application to these financial instruments follows.
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