Morgan Stanley 2010 Annual Report Download - page 142

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
dividend equivalents subject to vesting are not deemed participating securities and are included in diluted shares
outstanding (if dilutive) under the treasury stock method.
The Company has granted performance-based stock units (“PSU”) that vest and convert to shares of common
stock only if the Company satisfies predetermined performance and market goals. Since the issuance of the
shares is contingent upon the satisfaction of certain conditions, the PSUs are included in diluted EPS based on the
number of shares (if any) that would be issuable if the end of the reporting period were the end of the
contingency period.
Stock-Based Compensation.
The Company accounts for stock-based compensation in accordance with the accounting guidance for equity-
based awards. This accounting guidance requires measurement of compensation cost for equity-based awards at
fair value and recognition of compensation cost over the service period, net of estimated forfeitures. The
Company determines the fair value of RSUs (including RSUs with non-market performance conditions) based on
the grant date fair value of the Company’s common stock, measured as the volume-weighted average price on the
date of grant. The fair value of stock options is determined using the Black-Scholes valuation model and the
single grant life method. Under the single grant life method, option awards with graded vesting are valued using
a single weighted average expected option life. RSUs with market-based conditions are valued using a Monte
Carlo valuation model.
Compensation expense for stock-based payment awards is recognized using the graded vesting attribution
method. Compensation expense for awards with performance conditions is recognized based on the probable
outcome of the performance condition at each reporting date. At the end of the contingency period, the total
compensation cost recognized will be the grant-date fair value of all units that actually vest based on the outcome
of the performance conditions. Compensation expense for awards with market-based conditions is recognized
irrespective of the probability of the market condition being achieved and is not reversed if the market condition
is not met.
Until its discontinuation on June 1, 2009, the Company’s Employee Stock Purchase Plan (the “ESPP”) allowed
employees to purchase shares of the Company’s common stock at a 15% discount from market value.
The Company expensed the 15% discount associated with the ESPP until its discontinuation.
The Company recognizes the expense for equity-based awards over the requisite service period. For anticipated
year-end equity awards that are granted to employees expected to be retirement-eligible under the award terms,
the Company accrues the estimated cost of these awards over the course of the current year. As such, the
Company accrued the estimated cost of 2010 year-end awards granted to employees who were retirement eligible
under the award terms over 2010 rather than expensing the awards on the date of grant (which occurred in
January 2011). The Company believes that this method of recognition for retirement-eligible employees is
preferable because it better reflects the period over which the compensation is earned.
Translation of Foreign Currencies.
Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates of
exchange, and income statement accounts are translated at weighted average rates of exchange for the year.
Gains or losses resulting from translating foreign currency financial statements, net of hedge gains or losses and
related tax effects, are reflected in Accumulated other comprehensive income (loss), a separate component of
Morgan Stanley Shareholders’ equity on the consolidated statements of financial condition. Gains or losses
resulting from remeasurement of foreign currency transactions are included in net income.
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