Morgan Stanley 2010 Annual Report Download - page 190

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
establishes a reserve for loan amounts it does not consider recoverable from terminated employees, which is
recorded in Compensation and benefits expense. At December 31, 2010, the Company had $5,831 million of
employee loans, net of an allowance of approximately $111 million.
Collateralized Transactions.
In certain instances, the Company enters into reverse repurchase agreements and securities borrowed transactions
to acquire securities to cover short positions, to settle other securities obligations and to accommodate customers’
needs. The Company also engages in securities financing transactions for customers through margin lending (see
Note 6).
Servicing Advances.
As part of its servicing activities, the Company is required to make servicing advances to the extent that it
believes that such advances will be reimbursed (see Note 7).
9. Goodwill and Net Intangible Assets.
The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events or
circumstances exist. The Company tests for impairment at the reporting unit level, which is generally at the level
of or one level below its business segments. Goodwill impairment is determined by comparing the estimated fair
value of a reporting unit with its respective book value. If the estimated fair value exceeds the book value,
goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below book value,
however, further analysis is required to determine the amount of the impairment.
The estimated fair values of the reporting units are generally determined utilizing methodologies that incorporate
price-to-book, price-to-earnings and assets under management multiples of certain comparable companies.
The Company completed its annual goodwill impairment testing as of July 1, 2010 and July 1, 2009. The
Company’s testing did not indicate any goodwill impairment. Due to the volatility in the equity markets, the
economic outlook and the Company’s common shares trading below book value during the quarters ended
September 30, 2010 and December 31, 2010, the Company performed additional impairment testing at
September 30, 2010 and December 31, 2010, which did not result in any goodwill impairment. Adverse market
or economic events could result in impairment charges in future periods.
In connection with the proposed sale of a majority equity stake in FrontPoint (see Note 28), the Company
recognized an impairment charge of $27 million.
Due to the financial market and economic events that occurred in the fourth quarter of fiscal 2008, the Company
performed an interim impairment test for goodwill subsequent to its annual testing date of June 1, 2008. The
interim impairment test resulted in a non-cash goodwill impairment charge of approximately $673 million. The
charge related to the fixed income business, which is a reporting unit within the Institutional Securities business
segment. The fair value of the fixed income business was calculated by comparison with similar companies using
their publicly traded price-to-book multiples as the basis for valuation. The impairment charge resulted from
declines in the credit and mortgage markets in general, which caused significant declines in the stock market
capitalization in the fourth quarter of fiscal 2008 and, hence, a decline in the fair value of the fixed income
business.
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