Morgan Stanley 2014 Annual Report Download - page 168

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For financial instruments categorized within Level 3 of the fair value hierarchy, VRG reviews the business
unit’s valuation techniques to ensure these are consistent with market participant assumptions.
The results of this independent price verification and any adjustments made by VRG to the fair value
generated by the business units are presented to management of the Company’s three business segments
(i.e., Institutional Securities, Wealth Management and Investment Management), the CFO and the Chief
Risk Officer on a regular basis.
Review of New Level 3 Transactions. VRG reviews the models and valuation methodology used to price
all new material Level 3 transactions, and both FCG and MRD management must approve the fair value of
the trade that is initially recognized.
For further information on financial assets and liabilities that are measured at fair value on a recurring and non-
recurring basis, see Note 4.
Hedge Accounting.
The Company applies hedge accounting using various derivative financial instruments to hedge interest rate and
foreign exchange risk arising from assets and liabilities not held at fair value as part of asset/liability and
currency management. These financial instruments are included within Trading assets—Derivative and other
contracts or Trading liabilities—Derivative and other contracts in the Company’s consolidated statements of
financial condition.
The Company’s hedges are designated and qualify for accounting purposes as one of the following types of
hedges: hedges of changes in fair value of assets and liabilities due to the risk being hedged (fair value hedges);
and hedges of net investments in foreign operations whose functional currency is different from the reporting
currency of the parent company (net investment hedges).
For further information on derivative instruments and hedging activities, see Note 12.
Consolidated Statements of Cash Flows.
For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of Cash and due
from banks and Interest bearing deposits with banks, which are highly liquid investments with original maturities
of three months or less, held for investment purposes, and readily convertible to known amounts of cash.
In the second quarter of 2014, the Company deconsolidated approximately $1.6 billion in total assets that were
related to certain legal entities associated with a real estate fund sponsored by the Company. The deconsolidation
resulted in a non-cash reduction of assets of $1.3 billion.
The Company’s significant non-cash activities in 2013 included assets and liabilities of approximately
$3.6 billion and $3.1 billion, respectively, disposed of in connection with business dispositions.
The Company’s significant non-cash activities in 2012 included assets and liabilities of approximately
$2.6 billion and $1.0 billion, respectively, disposed of in connection with business dispositions, and
approximately $1.1 billion of net assets received from Citigroup Inc. (“Citi”) related to Citi’s required equity
contribution in connection with the retail securities joint venture between the Company and Citi (the “Wealth
Management JV”) platform integration (see Notes 3 and 15).
Transfers of Financial Assets.
Transfers of financial assets are accounted for as sales when the Company has relinquished control over the
transferred assets. Any related gain or loss on sale is recorded in Net revenues. Transfers that are not accounted
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