JP Morgan Chase 2003 Annual Report Download - page 80

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
78 J.P. Morgan Chase & Co. / 2003 Annual Report
Accounting for stock-based compensation
Effective January 1, 2003, JPM organ Chase adopted SFAS 123,
w hich establishes the accounting for stock-based compensation
and requires that all such transactions, including stock options,
be accounted for at fair value and be recognized in earnings.
Aw ards outstanding as of December 31, 2002, if not subse-
quently modified, continue to be accounted for under APB 25.
For a further discussion on the adoption of SFAS 123, see Note 7
on pages 93–95 of this Annual Report.
Consolidation of variable interest entities
In January 2003, the FASB issued FIN 46. Entities that w ould be
assessed for consolidation under FIN 46 are typically referred to
as Special-Purpose Entities (“ SPEs” ), although non-SPE-type enti-
ties may also be subject to the guidance. FIN 46 requires a vari-
able interest entity (“ VIE” ) to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entity’s activities or entitled to receive a majority
of the entity’s residual returns, or both. Effective February 1,
2003, the Firm implemented FIN 46 for VIEs created or modified
after January 31, 2003, in w hich the Firm has an interest.
Effective July 1, 2003, the Firm adopted the provisions of FIN 46
for all VIEs originated prior to February 1, 2003, excluding cer-
tain investments made by JPM P. The FASB provided a specific
deferral for nonregistered investment companies until the pro-
posed Statement of Position on the clarification of the scope of
the Investment Company Audit Guide is finalized, w hich is
expected to occur in mid-2004. The Firm has deferred consolida-
tion of $2.7 billion of additional assets related to JPM P as of
December 31, 2003. For further details regarding FIN 46, refer
to Note 14 on pages 103–106 of this Annual Report.
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 its issuance. The provisions of
FIN 46R are effective for financial periods ending after M arch 15,
2004, thus the Firm w ill implement the new provisions effective
M arch 31, 2004. As FIN 46R w as recently issued and contains
provisions that the accounting profession continues to analyze,
the Firm’s assessment of the impact of FIN 46R on all VIEs w ith
w hich it is involved is ongoing. How ever, at this time and based
on management’s current interpretation, the Firm does not
believe that the implementation of FIN 46R w ill have a material
impact on the Firm’s Consolidated financial statements, earnings
or capital resources.
Accounting for certain financial instruments
with characteristics of both liabilities and equity
In M ay 2003, the FASB issued SFAS 150, w hich establishes stan-
dards for how an issuer classifies and measures in its statement
of financial position certain financial instruments w ith character-
istics of both liabilities and equity. It requires that an issuer classify
a financial instrument that is w ithin its scope as a liability (or an
asset in some circumstances), because that financial instrument
embodies an obligation of the issuer. Initially, SFAS 150 w as
effective for all financial instruments entered into or modified
after M ay 31, 2003, and w as otherw ise effective beginning July
1, 2003. In November 2003, the FASB deferred the effective
date of the statement with respect to mandatorily redeemable
financial instruments of certain nonpublic entities and for cer-
tain mandatorily redeemable noncontrolling interests. The imple-
mentation of SFAS 150 did not have a material impact on the
Firm’s Consolidated financial statements.
Derivative instruments and hedging activities
In April 2003, the FASB issued SFAS 149, w hich amends and
clarifies the accounting for derivative instruments, including cer-
tain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. Specifically, SFAS 149 clarifies
the circumstances under w hich a contract w ith an initial net
investment meets the characteristics of a derivative, and w hen a
derivative contains a financing component that w arrants special
reporting in the Consolidated statement of cash flow s. SFAS
149 is generally effective for contracts entered into or modified
after June 30, 2003; implementation did not have a material
effect on the Firm’s Consolidated financial statements in 2003.
Accounting for costs associated with exit or
disposal activities
In June 2002, the FASB issued SFAS 146, w hich establishes new
accounting for costs associated w ith exit or disposal activities
initiated after December 31, 2002. SFAS 146 requires a liability
for a cost associated with an exit or disposal activity to be
recorded w hen that liability is incurred and can be measured at
fair value. Under the previous rules, if management approved an
exit plan in one quarter, the costs of that plan generally w ould
have been recorded in the same quarter even if the costs w ere
not incurred until a later quarter. In contrast, under SFAS 146,
some costs may qualify for immediate recognition, w hile other
costs may be incurred over one or more quarters. The impact of
SFAS 146 w ill generally be to spread out the timing of the
recognition of costs associated w ith exit or disposal activities.
Impairment of available-for-sale and held-to-
maturity securities
In November 2003, the Emerging Issues Task Force (“ EITF” )
reached a consensus on certain additional quantitative and
qualitative disclosure requirements in connection w ith its
deliberations of Issue 03-1, the impairment model for available-
for-sale and held-to-maturity securities under SFAS 115. See
Note 9 on page 97 of this Annual Report which sets forth the
disclosures now required.
Accounting and reporting developments