JP Morgan Chase 2008 Annual Report Download - page 169

JPMorgan Chase & Co./ 2008 Annual Report 167
Note 10 – Employee stock-based incentives
Effective January 1, 2006, the Firm adopted SFAS 123R and all relat-
ed interpretations using the modified prospective transition method.
SFAS 123R requires all share-based payments to employees, includ-
ing employee stock options and stock appreciation rights (“SARs”),
to be measured at their grant date fair values. The Firm also adopted
the transition election provided by FSP FAS 123(R)-3.
Upon adopting SFAS 123R, the Firm began to recognize in the
Consolidated Statements of Income compensation expense for
unvested stock options previously accounted for under APB 25.
Additionally, JPMorgan Chase recognized as compensation expense
an immaterial cumulative effect adjustment resulting from the SFAS
123R requirement to estimate forfeitures at the grant date instead of
recognizing them as incurred. Finally, the Firm revised its accounting
policies for share-based payments granted to employees eligible for
continued vesting under specific age and service or service-related
provisions (“full-career eligible employees”) under SFAS 123R. Prior
to adopting SFAS 123R, the Firm’s accounting policy for share-based
payment awards granted to full-career eligible employees was to rec-
ognize compensation cost over the award’s stated service period.
Beginning with awards granted to full-career eligible employees in
2006, JPMorgan Chase recognized compensation expense on the
grant date without giving consideration to the impact of post-
employment restrictions. In the first quarter of 2006, the Firm also
began to accrue the estimated cost of stock awards granted to full-
career eligible employees in the following year.
In June 2007, the FASB ratified EITF 06-11, which requires that real-
ized tax benefits from dividends or dividend equivalents paid on
equity-classified share-based payment awards that are charged to
retained earnings be recorded as an increase to additional paid-in
capital and included in the pool of excess tax benefits available to
absorb tax deficiencies on share-based payment awards. Prior to the
issuance of EITF 06-11, the Firm did not include these tax benefits
as part of this pool of excess tax benefits. The Firm adopted EITF
06-11 on January 1, 2008. The adoption of this consensus did not
have an impact on the Firm’s Consolidated Balance Sheets or results
of operations.
In connection with the Bear Stearns merger, 46 million Bear Stearns
employee stock awards, principally restricted stock units (“RSUs”),
capital appreciation plan units and stock options, were exchanged
for equivalent JPMorgan Chase awards using the merger exchange
ratio of 0.21753. The fair value of these employee stock awards was
included in the purchase price since substantially all of the awards
were fully vested immediately after the merger date under provisions
that provided for accelerated vesting upon a change of control of
Bear Stearns. However, Bear Stearns vested employee stock options
had no impact on the purchase price; since the employee stock
options were significantly out of the money at the merger date, the
fair value of these awards was equal to zero upon their conversion
into JPMorgan Chase options.
The Firm also exchanged 6 million shares of its common stock for 27
million shares of Bear Stearns common stock held in an irrevocable
grantor trust (the “RSU Trust”) using the merger exchange ratio of
0.21753. The RSU Trust was established to hold common stock
underlying awards granted to selected employees and key executives
under certain Bear Stearns employee stock plans. The RSU Trust was
consolidated on JPMorgan Chase’s Consolidated Balance Sheets as
of June 30, 2008, and the shares held in the RSU Trust were record-
ed in “Shares held in RSU Trust,” which reduced stockholders’ equity,
similar to the treatment for treasury stock. A related obligation to
issue stock under these employee stock plans is reported in capital
surplus. The issuance of shares held in the RSU Trust to employees
will not have any effect on the Firm’s total stockholders’ equity, net
The following table presents the actual rate of return on plan assets for the U.S. and non-U.S. defined benefit pension and OPEB plans.
U.S. Non-U.S.
December 31, 2008 2007 2006 2008 2007 2006
Actual rate of return:
Defined benefit pension plans (25.17)% 7.96% 13.40% (21.58)-5.06% 0.06-7.51% 2.80-7.30%
OPEB plans (17.89) 6.51 9.30 NA NA NA
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated.
The OPEB medical and life insurance payments are net of expected retiree contributions.
U.S. Non-U.S.
Year ended December 31, defined benefit defined benefit OPEB before Medicare
(in millions) pension plans pension plans Medicare Part D subsidy Part D subsidy
2009 $ 917 $ 88 $ 109 $ 11
2010 928 94 111 12
2011 597 99 112 13
2012 616 102 110 14
2013 629 107 109 15
Years 2014–2018 3,333 571 513 87