Morgan Stanley 2014 Annual Report Download - page 97

• Estimating the fair value of funding costs and benefits in the principal exit market; and
• Determining the interaction between Credit Valuation Adjustment (“CVA”) and FVA, given that CVA
already reflects credit spreads, which are related to and can impact funding spreads.
For a further discussion of valuation adjustments applied by the Company, see Note 2 to the Company’s
consolidated financial statements in Item 8.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis. At December 31, 2014 and
December 31, 2013, certain of the Company’s assets and liabilities were measured at fair value on a non-
recurring basis, primarily relating to loans, other investments, premises, equipment and software costs, intangible
assets and other assets. The Company incurs losses or gains for any adjustments of these assets to fair value. A
downturn in market conditions could result in impairment charges in future periods.
For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using
various valuation approaches. The same hierarchy as described above, which maximizes the use of observable
inputs and minimizes the use of unobservable inputs by generally requiring that the observable inputs be used
when available, is used in measuring fair value for these items.
See Note 4 to the Company’s consolidated financial statements in Item 8 for further information on assets and
liabilities that are measured at fair value on a non-recurring basis.
Fair Value Control Processes.The Company employs control processes to validate the fair value of its
financial instruments, including those derived from pricing models. These control processes are designed to
ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event
that observable inputs are not available, the control processes are designed to assure that the valuation approach
utilized is appropriate and consistently applied and that the assumptions are reasonable.
See Note 2 to the Company’s consolidated financial statements in Item 8 for additional information regarding the
Company’s valuation policies, processes and procedures.
Goodwill and Intangible Assets.
Goodwill. The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basis
when certain events or circumstances exist. The Company tests for impairment at the reporting unit level, which
is generally at the level of or one level below its business segments. Goodwill no longer retains its association
with a particular acquisition once it has been assigned to a reporting unit. As such, all the activities of a reporting
unit, whether acquired or organically developed, are available to support the value of the goodwill. For both the
annual and interim tests, the Company has the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the
Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying
amount, then performing the two-step impairment test is not required. However, if the Company concludes
otherwise, then it is required to perform the first step of the two-step impairment test. Goodwill impairment is
determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the
estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired.
If the estimated fair value is below carrying value, however, further analysis is required to determine the amount
of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is
determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair
value of the reporting units is derived based on valuation techniques the Company believes market participants
would use for each of the reporting units. The estimated fair value is generally determined by utilizing a
discounted cash flow methodology or methodologies that incorporate price-to-book and price-to-earnings
multiples of certain comparable companies. At each annual goodwill impairment testing date, each of the
Company’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.
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