Morgan Stanley 2014 Annual Report Download - page 164

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
arrangement. The amount of performance-based fee revenue at risk of reversing if fund performance falls below
stated investment management agreement benchmarks was approximately $634 million and $489 million at
December 31, 2014 and December 31, 2013, respectively.
Trading and Investments. See “Financial Instruments and Fair Value” below for Trading and Investments
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.
Financial Instruments Measured at Fair Value. All of the instruments within Trading assets and Trading
liabilities are measured at fair value, either through the fair value option election (discussed below) or as required
by other accounting guidance. These financial instruments primarily represent the Company’s trading and
investment positions and include both cash and derivative products. In addition, debt securities classified as
available for sale (“AFS”) securities are measured at fair value in accordance with accounting guidance for
certain investments in debt securities. Furthermore, Securities received as collateral and Obligation to return
securities received as collateral are measured at fair value as required by other accounting guidance.
Additionally, certain Deposits, certain Commercial paper and other short-term borrowings (structured notes),
certain Other secured financings, certain Securities sold under agreements to repurchase and certain Long-term
borrowings (primarily structured notes) are measured at fair value through the fair value option election.
Gains and losses on all of these instruments carried at fair value are reflected in Trading revenues, Investments
revenues or Investment banking revenues in the Company’s consolidated statements of income, except for AFS
securities (see “Investment Securities—Available for Sale and Held to Maturity” section herein and Note 5) and
derivatives accounted for as hedges (see “Hedge Accounting” section herein and Note 12). Interest income and
interest expense are recorded within the Company’s consolidated statements of income depending on the nature
of the instrument and related market conventions. When interest is included as a component of the instruments’
fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within
Interest income or Interest expense. Dividend income is recorded in Trading revenues or Investments revenues
depending on the business activity. The fair value of OTC financial instruments, including derivative contracts
related to financial instruments and commodities, is presented in the accompanying consolidated statements of
financial condition on a net-by-counterparty basis, when appropriate. Additionally, the Company nets the fair
value of cash collateral paid or received against the fair value amounts recognized for net derivative positions
executed with the same counterparty under the same master netting agreement.
Fair Value Option. The fair value option permits the irrevocable fair value option election on an instrument-by-
instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument. The Company applies the fair value option for eligible instruments, including
certain securities purchased under agreements to resell, certain loans and lending commitments, certain equity
method investments, certain securities sold under agreements to repurchase, certain structured notes, certain time
deposits and certain other secured financings.
Fair Value Measurement—Definition and Hierarchy. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market
participants at the measurement date.
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