JP Morgan Chase 2003 Annual Report Download - page 109

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Goodwill and other intangible assets
Effective January 1, 2002, the Firm adopted SFAS 142, reclassi-
fying certain intangible assets from Goodw ill to Other intangible
assets. There w as no impairment of goodw ill upon adoption of
SFAS 142.
Goodw ill is not amortized, but instead tested for impairment at
the reporting-unit segment (which is one level below the five
major business segments as described in Note 34 on pages 126-
127 of this Annual Report). Goodw ill is tested annually (during
the fourth quarter) or more often if events or circumstances,
such as adverse changes in the business climate, indicate there
may be impairment. Other acquired intangible assets deter-
mined to have finite lives, such as core deposits and credit card
relationships, are amortized over their estimated useful lives
in a manner that best reflects the economic benefits of the
intangible asset. In addition, impairment testing is performed
periodically on these amortizing intangible assets.
The follow ing table presents the impact of SFAS 142 on net
income and earnings per share had the accounting standard
been in effect for 2001:
Note 16
Goodw ill and Other intangible assets consist of the follow ing:
December 31, (in millions) 2003 2002
Goodwill $8,511 $ 8,096
Other intangible assets:
Mortgage servicing rights $4,781 $ 3,230
Purchased credit card relationships 1,014 1,269
All other intangibles 685 307
Total other intangible assets $6,480 $ 4,806
Year ended December 31, (in millions, Pro Forma
except earnings per share) 2003 2002 2001
Net Income
Income before effect of accounting change $6,719 $ 1,663 $ 1,719
Net effect of change in accounting principle ——(25)
Net income 6,719 1,663 1,694
Goodwill amortization, net of taxes —— 393
Adjusted net income $6,719 $ 1,663 $ 2,087
Basic Earnings per Share
Reported basic earnings per share $3.32 $ 0.81 $ 0.83
Goodwill amortization —— 0.19
Adjusted basic earnings per share $3.32 $ 0.81 $ 1.02
Diluted Earnings per Share
Reported diluted earnings per share $3.24 $ 0.80 $ 0.80
Goodwill amortization —— 0.19
Adjusted diluted earnings per share $3.24 $ 0.80 $ 0.99
Goodwill
Goodw ill increased during 2003 by $415 million, principally
in connection w ith acquisitions of businesses by Treasury &
Securities Services, and purchase accounting adjustments. No
goodw ill w as w ritten off during 2003 or 2002.
Goodw ill by business segment is as follow s:
December 31, (in millions) 2003 2002
Investment Bank $2,058 $ 2,051
Treasury & Securities Services 1,390 996
Investment M anagement & Private Banking 4,179 4,165
JPMorgan Partners 377 377
Chase Financial Services 507 507
Total goodwill $8,511 $ 8,096
Mortgage servicing rights
JPM organ Chase recognizes as intangible assets M ortgage servic-
ing rights (“ M SRs” ), w hich represent the right to perform speci-
fied residential mortgage servicing activities for others. M SRs are
either purchased from third parties or retained upon sale or
securitization of mortgage loans. Servicing activities include col-
lecting principal, interest, and escrow payments from borrow ers;
making tax and insurance payments on behalf of the borrow ers;
monitoring delinquencies and executing foreclosure proceed-
ings; and accounting for and remitting principal and interest
payments to the investors of the mortgage-backed securities.
The amount capitalized as M SRs represents the amount paid to
third parties to acquire M SRs or is based on fair value if retained
upon sale or securitization of mortgage loans. The Firm esti-
mates the fair value of M SRs using a discounted future cash
flow model. The model considers portfolio characteristics, con-
tractually specified servicing fees, prepayment assumptions,
delinquency rates, late charges, other ancillary revenues, costs
to service and other economic factors. The Firm compares its
fair value estimates and assumptions to observable market data
w here available and to recent market activity and actual port-
folio experience. M anagement believes that the assumptions
used to estimate fair values are supportable and reasonable.
The Firm accounts for its M SRs at the low er of cost or market,
in accordance with SFAS 140. M SRs are amortized as a reduc-
tion of the actual servicing income received in proportion to,
and over the period of the estimated future net servicing
income stream of, the underlying mortgage loans. For purposes
J.P. Morgan Chase & Co. / 2003 Annual Report 107