Morgan Stanley 2015 Annual Report Download - page 146

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Payments received on nonaccrual loans held for investment are applied to principal if there is doubt regarding the ultimate
collectability of principal (i.e., cost recovery method). If collection of the principal of nonaccrual loans held for investment is
not in doubt, interest income is recognized on a cash basis. If neither principal nor interest collection is in doubt, loans are on
accrual status and interest income is recognized using the effective interest method. Loans that are on nonaccrual status may
not be restored to accrual status until all delinquent principal and/or interest has been brought current after a reasonable
period of performance, typically a minimum of six months.
Charge-offs. The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the
allowance for loan losses and the balance of the loan. In general, any portion of the recorded investment in a collateral
dependent loan (including any capitalized accrued interest, net deferred loan fees or costs and unamortized premium or
discount) in excess of the fair value of the collateral that can be identified as uncollectible, and is therefore deemed a
confirmed loss, is charged off against the allowance for loan losses. A loan is collateral-dependent if the repayment of the
loan is expected to be provided solely by the sale or operation of the underlying collateral. In addition, for loan transfers from
loans held for investment to loans held for sale, at the time of transfer, any reduction in the loan value is reflected as a
charge-off of the recorded investment, resulting in a new cost basis.
Loan Commitments. The Company records the liability and related expense for the credit exposure related to commitments
to fund loans that will be held for investment in a manner similar to outstanding loans disclosed above. The analysis also
incorporates a credit conversion factor, which is the expected utilization of the undrawn commitment. The liability is
recorded in Other liabilities and accrued expenses in the consolidated statements of financial condition, and the expense is
recorded in Other non-interest expenses in the consolidated statements of income. For more information regarding loan
commitments, standby letters of credit and financial guarantees, see Note 12.
Loans Held for Sale.
Loans held for sale are measured at the lower of cost or fair value, with valuation changes recorded in Other revenues. The
Company determines the valuation allowance on an individual loan basis, except for residential mortgage loans for which the
valuation allowance is determined at the loan product level. Any decreases in fair value below the initial carrying amount and
any recoveries in fair value up to the initial carrying amount are recorded in Other revenues. However, increases in fair value
above initial carrying value are not recognized.
Interest income on loans held for sale is accrued and recognized based on the contractual rate of interest. Loan origination
fees or costs and purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The
deferred fees and discounts or premiums are an adjustment to the basis of the loan and, therefore, are included in the periodic
determination of the lower of cost or fair value adjustments and/or the gain or loss recognized at the time of sale.
Loans held for sale are subject to the nonaccrual policies described above. Because loans held for sale are recognized at the
lower of cost or fair value, the allowance for loan losses and charge-off policies does not apply to these loans.
Loans at Fair Value.
Loans for which the fair value option is elected are carried at fair value, with changes in fair value recognized in earnings.
Loans carried at fair value are not evaluated for purposes of recording an allowance for loan losses. For further information
on loans carried at fair value and classified as Trading assets and Trading liabilities,see Note 3.
For further information on loans, see Note 7.
Accounting Standards Adopted.
Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures.
In June 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting update requiring repurchase-to-
maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements.
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