JP Morgan Chase 2003 Annual Report Download - page 124

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Notes to consolidated financial statements
J.P. M organ Chase & Co.
122 J.P. Morgan Chase & Co./ 2003 Annual Report
•Fair values for consumer installment loans (including auto-
mobile financings) and 1–4 family residential mortgages, for
w hich market rates for comparable loans are readily avail-
able, are based on discounted cash flow s, adjusted for pre-
payments. The discount rates used for consumer installment
loans are current rates offered by commercial banks. For 1–4
family residential mortgages, secondary market yields for com-
parable mortgage-backed securities, adjusted for risk, are used.
•Fair value for credit card receivables is based on discounted
expected cash flow s. The discount rates used for credit card
receivables incorporate only the effects of interest rate
changes, since the expected cash flow s already reflect an
adjustment for credit risk.
•The fair value of loans in the held-for-sale and trading port-
folios is generally based on observable market prices and
prices of similar instruments, including bonds, credit deriva-
tives and loans w ith similar characteristics. Otherwise, if
market prices are not available, the fair value is based on
the estimated cash flow s adjusted for credit risk; that risk is
discounted, using a rate appropriate for each maturity that
incorporates the effects of interest rate changes.
Other assets
This caption includes private equity investments and M SRs.
For a discussion of the fair value methodology for private equity
investments, see Note 15 on page 106 of this Annual Report.
For a discussion of the fair value methodology for M SRs, see
Note 16 on pages 107-109 of this Annual Report.
Financial liabilities
Liabilities for which fair value approximates
carrying value
SFAS 107 requires that the fair value disclosed for deposit liabili-
ties w ith no stated maturity (i.e., demand, savings and certain
money market deposits) be equal to their carrying value. SFAS
107 does not allow for the recognition of the inherent funding
value of these instruments.
Fair value of commercial paper, other borrow ed funds, accounts
payable and accrued liabilities is considered to approximate their
respective carrying values due to their short-term nature.
Interest-bearing deposits
Fair values of interest-bearing deposits are estimated by dis-
counting cash flow s based on the remaining contractual maturi-
ties of funds having similar interest rates and similar maturities.
Federal funds purchased and securities sold under
repurchase agreements
Federal funds purchased and securities sold under repurchase
agreements are typically short-term in nature, and as such, for a
significant majority of the Firm’s transactions, cost approximates
carrying value. This balance sheet item also includes structured
repurchase agreements and similar products w ith long-dated
maturities. To estimate the fair value of these instruments, the
cash flow s are discounted using the appropriate market rates
for the applicable maturity.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs (“ beneficial
interests” ) are generally short-term in nature, and as such, for
a significant majority of the Firm’s transactions, cost approxi-
mates carrying value. The Consolidated balance sheet also
includes beneficial interests w ith long-dated maturities. The fair
value of these instruments is based on current market rates.
Long-term debt-related instruments
Fair value for long-term debt, including the guaranteed preferred
beneficial interests in the Firm’s junior subordinated deferrable
interest debentures, is based on current market rates and is
adjusted for JPM organ Chase’s credit quality.
Lending-related commitments
The Firm estimates the fair value of its commercial commitments
to extend credit based on the cost of credit derivatives. The Firm
estimates the fair value of its consumer commitments to extend
credit based on the primary market prices to originate new com-
mitments. It is the change in current primary market prices that
provides the estimate of the fair value of these commitments.
On this basis, at December 31, 2003, the fair value of the Firm’s
lending-related commitments approximated the Allow ance for
lending-related commitments of $324 million. At December 31,
2002, the fair value of the Firm’s lending-related commitments
w as approximately $1.3 billion, compared w ith the Allow ance
for lending-related commitments of $363 million.