JP Morgan Chase 2003 Annual Report Download - page 108

Notes to consolidated financial statements
J.P. M organ Chase & Co.
106 J.P. Morgan Chase & Co./ 2003 Annual Report
additional assets in potential VIEs w ith w hich JPM P is involved as
of December 31, 2003. Follow ing issuance of the revised Audit
Guide and further modification, if any, to FIN 46, the Firm w ill
assess the effect of such guidance on its private equity business.
Upon adoption of FIN 46, the assets, liabilities and noncontrolling
interests of VIEs w ere generally measured at the amounts at
w hich such interests would have been carried had FIN 46 been
effective w hen the Firm first met the conditions to be considered
the primary beneficiary. For certain VIEs, the initial carrying
amount of the assets and liabilities (approximately $1.7 billion)
w as based on fair value at July 1, 2003, due to limited historical
information. The difference betw een the net amount added to
the balance sheet and the amount of any previously recognized
interest in the new ly consolidated entity was recognized as a
cumulative effect of an accounting change at July 1, 2003, w hich
resulted in a $2 million (after-tax) reduction to the Firm’s consoli-
dated earnings. The Firm also recorded a $34 million (after-tax)
reduction in Other comprehensive income, related to Available-
for-sale securities and derivative cash flow hedges; these w ere
related to entities measured at the amount at which such
interests w ould have been carried had FIN 46 been effective w hen
the Firm first met the conditions of being the primary beneficiary.
The follow ing table summarizes the Firm’s total consolidated VIE
assets, by classification on the Consolidated balance sheet, as of
December 31, 2003.
December 31, (in billions) 2003
Consolidated VIE assets(a)
Loans(b) $5.8
Investment securities 3.8
Trading assets(c) 2.7
Other assets 0.1
Total consolidated assets $12.4
(a) The Firm also holds $3 billion of assets, primarily as a seller’s interest, in certain consumer
securitizations in a segregated entity, as part of a two-step securitization transaction. This
interest is included in the securitization activities disclosed in Note 13 on pages 100-103 of
this Annual Report and is not included herein.
(b) Primarily relates to the consolidated multi-seller asset-backed commercial paper conduits.
(c) Includes securities and derivatives.
In the third quarter of 2003, the Firm classified the interest-bearing
beneficial interest liabilities issued by consolidated VIEs in a new
line item titled “ Beneficial interests issued by consolidated variable
interest entities.” The holders of these beneficial interests do not
have recourse to the general credit of JPM organ Chase. See Note
18 on page 110 of this Annual Report for the maturity profile of
the FIN 46 long-term beneficial interests.
In December 2003, the FASB issued a revision to FIN 46 (“ FIN
46R” ) to address various technical corrections and implementa-
tion issues that have arisen since the issuance of FIN 46. The
provisions of FIN 46R are effective for financial periods ending
after M arch 15, 2004. The Firm w ill adopt FIN 46R at the effec-
tive date and is currently assessing the impact of FIN 46R on all
VIEs w ith w hich it is involved.
Private equity investments
Private equity investments are primarily held by JPM organ
Partners (“ JPM P” ), the Firm’s global private equity investment
business segment. JPM P invests in buyouts, grow th equity and
venture opportunities in the normal course of business. These
investments are accounted for under investment company guide-
lines. Accordingly, these investments, irrespective of the percent-
age of equity ow nership interest held by JPM P, are carried on the
Consolidated balance sheet at fair value. Realized and unrealized
gains and losses arising from changes in value are reported in
Private equity gains (losses) in the Consolidated statement of
income in the period that the gain or loss occurs.
Private investments are initially valued based on cost. The carrying
values of private investments are adjusted from cost to reflect
both positive and negative changes evidenced by financing events
w ith third-party capital providers. In addition, these investments
are subject to ongoing impairment reviews by JPM P’s senior
investment professionals. A variety of factors are review ed and
monitored to assess impairment – including, but not limited to,
operating performance and future expectations, comparable
industry valuations of public companies, changes in market out-
look and changes in the third-party financing environment. The
Valuation Control Group w ithin the Finance area is responsible
for reviewing the accuracy of the carrying values of private
investments held by JPM P.
JPM P also holds public equity investments, generally obtained
through the initial public offering of private equity investments.
These investments are marked to market at the quoted public
value. To determine the carrying values of these investments,
JPM P incorporates the use of discounts to take into account the
fact that it cannot immediately realize or hedge the quoted
public values as a result of regulatory, corporate and/or contrac-
tual sales restrictions imposed on these holdings.
The follow ing table presents the carrying value and cost of the
private equity investment portfolio for the dates indicated:
2003 2002
Carrying Carrying
December 31, (in millions) value Cost value Cost
Total investment portfolio $7,250 $ 9,147 $ 8,228 $ 10,312
The follow ing table presents private equity investment realized
and unrealized gains and losses for the periods indicated:
Year ended December 31, (in millions) 2003 2002 2001
Realized gains (losses) $(44) $(105) $ 651
Unrealized gains (losses) 77 (641) (1,884)
Private equity gains (losses)(a) $33 $(746) $ (1,233)
(a) Includes the impact of portfolio hedging activities.
Note 15