Morgan Stanley 2010 Annual Report Download - page 85

lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional
loss can be reasonably estimated for any proceeding.
The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those of
the foreign jurisdictions in which the Company has significant business operations. These tax laws are complex
and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The
Company must make judgments and interpretations about the application of these inherently complex tax laws
when determining the provision for income taxes and the expense for indirect taxes and must also make estimates
about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over
interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The Company
periodically evaluates the likelihood of assessments in each taxing jurisdiction resulting from current and
subsequent years’ examinations, and unrecognized tax benefits are established as appropriate. The Company
establishes a liability for unrecognized tax benefits related to potential losses that may arise from tax audits in
accordance with the guidance on accounting for unrecognized tax benefits. Once established, unrecognized tax
benefits are adjusted when there is more information available or when an event occurs requiring a change.
Significant judgment is required in making these estimates, and the actual cost of a legal claim, tax assessment or
regulatory fine/penalty may ultimately be materially different from the recorded accruals and unrecognized tax
benefits, if any. See Notes 13 and 22 to the consolidated financial statements for additional information on legal
proceedings and tax examinations.
Special Purpose Entities and Variable Interest Entities.
The Company’s involvement with special purpose entities (“SPE”) consists primarily of the following:
• Transferring financial assets into SPEs;
• Acting as an underwriter of beneficial interests issued by securitization vehicles;
• Holding one or more classes of securities issued by, or making loans to or investments in, SPEs that hold
debt, equity, real estate or other assets;
• Purchasing and selling (in both a market-making and a proprietary-trading capacity) securities issued by
SPEs/variable interest entities (“VIE”), whether such vehicles are sponsored by the Company or not;
• Entering into derivative transactions with SPEs (whether or not sponsored by the Company);
• Providing warehouse financing to collateralized debt obligations and collateralized loan obligations;
• Entering into derivative agreements with non-SPEs whose value is derived from securities issued by
SPEs;
• Servicing assets held by SPEs or holding servicing rights related to assets held by SPEs that are serviced
by others under subservicing arrangements;
• Serving as an asset manager to various investment funds that may invest in securities that are backed, in
whole or in part, by SPEs; and
• Structuring and/or investing in other structured transactions designed to provide enhanced, tax-efficient
yields to the Company or its clients.
The Company engages in securitization activities related to commercial and residential mortgage loans, U.S.
agency collateralized mortgage obligations, corporate bonds and loans, municipal bonds and other types of
financial instruments. The Company’s involvement with SPEs is discussed further in Note 7 to the consolidated
financial statements.
79