Morgan Stanley 2014 Annual Report Download - page 170

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
realize deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to
the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
Uncertain tax positions are recorded on the basis of a two-step process whereby (1) the Company determines
whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the
position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company
recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement
with the related tax authority. Interest and penalties related to unrecognized tax benefits are classified as
provision for income taxes.
Earnings per Common Share.
Basic earnings per common share (“EPS”) is computed by dividing income available to Morgan Stanley common
shareholders by the weighted average number of common shares outstanding for the period. Income available to
Morgan Stanley common shareholders represents net income applicable to Morgan Stanley reduced by preferred
stock dividends and allocations of earnings to participating securities. Common shares outstanding include
common stock and vested restricted stock units (“RSUs”) where recipients have satisfied either the explicit
vesting terms or retirement eligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive
securities.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and are included in the computation of EPS pursuant to the
two-class method. Share-based payment awards that pay 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 (“PSUs”) 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 was the end of the contingency
period.
Deferred Compensation.
Stock-Based Compensation. The Company measures compensation cost for stock-based awards at fair value and
recognizes 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. RSUs with
market-based conditions are valued using a Monte Carlo valuation model. 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.
Compensation expense for stock-based compensation 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.
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