Morgan Stanley 2010 Annual Report Download - page 141

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Premises, equipment and software costs are tested for impairment whenever events or changes in circumstances
suggest that an asset’s carrying value may not be fully recoverable in accordance with current accounting
guidance.
Income Taxes.
Income tax expense (benefit) is provided for using the asset and liability method, under which deferred tax assets
and related valuation allowance (recorded in Other assets) and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of assets and liabilities using
currently enacted tax rates.
Earnings per Common Share.
Basic earnings per common share (“EPS”) is computed by dividing income available to Morgan Stanley common
shareholders by the weighted average number of common shares outstanding for the period. Income available to
Morgan Stanley common shareholders represents net income applicable to Morgan Stanley reduced by preferred
stock dividends and allocations of earnings to participating securities. Common shares outstanding include
common stock and vested restricted stock units (“RSUs”) where recipients have satisfied either the explicit
vesting terms or retirement eligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive
securities.
In December 2007, the Company sold Equity Units that included contracts to purchase Company common stock
to a wholly owned subsidiary of China Investment Corporation (“CIC”), (the “CIC Entity”), for approximately
$5,579 million. Effective October 13, 2008, the Company began calculating EPS in accordance with the
accounting guidance for determining EPS for participating securities as a result of an adjustment to these Equity
Units. The accounting guidance for participating securities and the two-class method of calculating EPS
addresses the computation of EPS by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the company along with common
shareholders according to a predetermined formula. The two-class method requires the Company to present EPS
as if all of the earnings for the period are distributed to Morgan Stanley common shareholders and any
participating securities, regardless of whether any actual dividends or distributions are made. The amount
allocated to the participating securities is based upon the contractual terms of their respective contract and is
reflected as a reduction to Net income applicable to Morgan Stanley common shareholders for the Company’s
basic and diluted EPS calculations (see Note 16). The two-class method does not impact the Company’s actual
net income applicable to Morgan Stanley or other financial results. Unless contractually required by the terms of
the participating securities, no losses are allocated to participating securities for purposes of the EPS calculation
under the two-class method.
On July 1, 2010, Moody’s Investors Service, Inc. (“Moody’s”) announced that it was lowering the equity credit
assigned to these Equity Units. The terms of the Equity Units permitted the Company to redeem the junior
subordinated debentures underlying the Equity Units upon the occurrence and continuation of such a change in
equity credit (a “Rating Agency Event”). In response to this Rating Agency Event, the Company redeemed the
junior subordinated debentures in August 2010, and the redemption proceeds were subsequently used by the CIC
Entity to settle its obligation under the purchase contracts. The settlement of the purchase contracts and delivery
of 116,062,911 shares of Company common stock to the CIC Entity occurred in August 2010.
Under current accounting guidance, unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in
the computation of EPS pursuant to the two-class method described above. Share-based payment awards that pay
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