Morgan Stanley 2015 Annual Report Download - page 77

Critical Accounting Policies.
The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, which require the Company
to make estimates and assumptions (see Note 1 to the consolidated financial statements in Item 8). The Company believes
that of its significant accounting policies (see Note 2 to the consolidated financial statements in Item 8), the following
policies involve a higher degree of judgment and complexity.
Fair Value.
Financial Instruments Measured at Fair Value.
A significant number of the Company’s financial instruments are carried at fair value. The Company makes estimates
regarding valuation of assets and liabilities measured at fair value in preparing the consolidated financial statements. These
assets and liabilities include, but are not limited to:
• Trading assets and Trading liabilities;
• AFS securities;
• Securities received as collateral and Obligation to return securities received as collateral;
• Certain Securities purchased under agreements to resell;
• Certain Deposits, primarily structured certificates of deposits;
• Certain Short-term borrowings, primarily structured notes;
• Certain Securities sold under agreements to repurchase;
• Certain Other secured financings; and
• Certain Long-term borrowings, primarily structured notes.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an
orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. A hierarchy for inputs is used in measuring fair
value that maximizes the use of observable prices and inputs and minimizes the use of unobservable prices and inputs by
requiring that the relevant observable inputs be used when available. The hierarchy is broken down into three levels, wherein
Level 1 uses quoted prices in active markets, Level 2 uses valuations based on quoted prices in markets that are not active or
for which all significant inputs are observable, and Level 3 consists of valuation techniques that incorporate significant
unobservable inputs and, therefore, require the greatest use of judgment. In periods of market disruption, the observability of
prices and inputs may be reduced for many instruments. This condition could cause an instrument to be recategorized from
Level 1 to Level 2 or Level 2 to Level 3. In addition, a downturn in market conditions could lead to declines in the valuation
of many instruments. For further information on the valuation process, fair value definition, Level 1, Level 2, Level 3 and
related valuation techniques, and quantitative information about and sensitivity of significant unobservable inputs used in
Level 3 fair value measurements, see Notes 2 and 3 to the consolidated financial statements in Item 8.
The Company incorporates FVA into the fair value measurements of OTC uncollateralized or partially collateralized
derivatives and in collateralized derivatives where the terms of the agreement do not permit the reuse of the collateral
received.
For a further discussion of valuation adjustments applied by the Company, see Note 2 to the consolidated financial
statements in Item 8.
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