Morgan Stanley 2014 Annual Report Download - page 182

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
with certain employee deferred compensation plans. Direct investments are presented in the fair value
hierarchy table as Principal investments and Other. Initially, the transaction price is generally considered
by the Company as the exit price and is the Company’s best estimate of fair value.
After initial recognition, in determining the fair value of non-exchange-traded internally and externally
managed funds, the Company generally considers the NAV of the fund provided by the fund manager to
be the best estimate of fair value. For non-exchange-traded investments either held directly or held within
internally managed funds, fair value after initial recognition is based on an assessment of each underlying
investment, considering rounds of financing and third-party transactions, discounted cash flow analyses
and market-based information, including comparable company transactions, trading multiples and
changes in market outlook, among other factors. Exchange-traded direct equity investments are generally
valued based on quoted prices from the exchange.
Exchange-traded direct equity investments that are actively traded are categorized in Level 1 of the fair
value hierarchy. Non-exchange-traded direct equity investments and investments in private equity and
real estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedge
funds that are redeemable at the measurement date or in the near future are categorized in Level 2 of the
fair value hierarchy; otherwise, they are categorized in Level 3 of the fair value hierarchy.
Physical Commodities.
• The Company trades various physical commodities, including crude oil and refined products, natural gas,
base and precious metals, and agricultural products. Fair value for physical commodities is determined
using observable inputs, including broker quotations and published indices. Physical commodities are
categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable,
they are categorized in Level 3 of the fair value hierarchy.
Investment Securities.
• AFS Securities. The Company’s AFS securities are composed of U.S. government and agency securities
(e.g., U.S. Treasury securities, agency-issued debt, agency mortgage pass-through securities and
collateralized mortgage obligations), CMBS, Federal Family Education Loan Program (“FFELP”) student
loan asset-backed securities, auto loan asset-backed securities, corporate bonds, collateralized loan
obligations and actively traded equity securities. Actively traded U.S. Treasury securities, non-callable
agency-issued debt securities and equity securities are generally categorized in Level 1 of the fair value
hierarchy. Callable agency-issued debt securities, agency mortgage pass-through securities, collateralized
mortgage obligations, CMBS, FFELP student loan asset-backed securities, auto loan asset-backed
securities, corporate bonds and collateralized loan obligations are generally categorized in Level 2 of the
fair value hierarchy. For further information on AFS securities, see Note 5.
Deposits.
•Time Deposits. The fair value of certificates of deposit is determined using third-party quotations.
These deposits are generally categorized in Level 2 of the fair value hierarchy.
Commercial Paper and Other Short-Term Borrowings/Long-Term Borrowings.
• Structured Notes. The Company issues structured notes that have coupon or repayment terms linked to
the performance of debt or equity securities, indices, currencies or commodities. Fair value of structured
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