Morgan Stanley 2014 Annual Report Download - page 173

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
basis of the debt security. If the Company does not expect to recover the entire amortized cost of those AFS debt
securities or HTM securities, the impairment is considered other-than-temporary and the Company determines
what portion of the impairment relates to a credit loss and what portion relates to non-credit factors.
A credit loss exists if the present value of cash flows expected to be collected (discounted at the implicit interest
rate at acquisition of the security or discounted at the effective yield for securities that incorporate changes in
prepayment assumptions) is less than the amortized cost basis of the security. Changes in prepayment
assumptions alone are not considered to result in a credit loss. When determining if a credit loss exists, the
Company considers relevant information including the length of time and the extent to which the fair value has
been less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or
geographic area; changes in the financial condition of the issuer of the security, or in the case of an asset-backed
debt security, changes in the financial condition of the underlying loan obligors; the historical and implied
volatility of the fair value of the security; the payment structure of the debt security and the likelihood of the
issuer being able to make payments that increase in the future; failure of the issuer of the security to make
scheduled interest or principal payments; any changes to the rating of the security by a rating agency and
recoveries or additional declines in fair value after the balance sheet date. When estimating the present value of
expected cash flows, information includes the remaining payment terms of the security, prepayment speeds,
financial condition of the issuer(s), expected defaults and the value of any underlying collateral.
For AFS equity securities, the Company considers various factors including the intent and ability to hold the
equity security for a period of time sufficient to allow for any anticipated recovery in market value in evaluating
whether an OTTI exists. If the equity security is considered other-than-temporarily impaired, the entire OTTI
(i.e., the difference between the fair value recorded on the balance sheet and the cost basis) will be recognized in
the Company’s consolidated statement of income.
Loans.
The Company accounts for loans based on the following categories: loans held for investment; loans held for
sale; and loans at fair value.
Loans Held for Investment
Loans held for investment are reported as outstanding principal adjusted for any charge-offs, the allowance for
loan losses, any deferred fees or costs for originated loans, and any unamortized premiums or discounts for
purchased loans.
Interest Income. Interest income on performing loans held for investment is accrued and recognized as interest
income at the contractual rate of interest. Purchase price discounts or premiums, as well as net deferred loan fees
or costs, are amortized into interest income over the life of the loan to produce a level rate of return.
Allowance for Loan Losses. The allowance for loan losses estimates probable losses related to loans
specifically identified for impairment in addition to the probable losses inherent in the held for investment loan
portfolio.
The Company utilizes the U.S. banking regulators’ definition of criticized exposures, which consist of the special
mention substandard and doubtful and loss categories as credit quality indicators. For further information on the
credit indicators, see Note 8. Substandard loans are regularly reviewed for impairment. Factors considered by
management when determining impairment include payment status, fair value of collateral, and probability of
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