JP Morgan Chase 2010 Annual Report Download - page 165

JPMorgan Chase & Co./2010 Annual Report 165
To assess whether the Firm has the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could potentially
be significant to the VIE, the Firm considers all of its economic inter-
ests, including debt and equity investments, servicing fees, and deriva-
tive or other arrangements deemed to be variable interests in the VIE.
This assessment requires that the Firm apply judgment in determining
whether these interests, in the aggregate, are considered potentially
significant to the VIE. Factors considered in assessing significance
include: the design of the VIE, including its capitalization structure;
subordination of interests; payment priority; relative share of interests
held across various classes within the VIE’s capital structure; and the
reasons why the interests are held by the Firm.
The Firm performs on-going reassessments of: (1) whether entities
previously evaluated under the majority voting-interest framework
have become VIEs, based on certain events, and therefore subject to
the VIE consolidation framework; and (2) whether changes in the facts
and circumstances regarding the Firm’s involvement with a VIE cause
the Firm’s consolidation conclusion to change.
For further details regarding the Firm’s application of the accounting
guidance effective January 1, 2010, see Note 16 on pages 244–259
of this Annual Report.
The Financial Accounting Standards Board (“FASB”) issued an
amendment which deferred the requirements of the accounting guid-
ance for certain investment funds, including mutual funds, private
equity funds and hedge funds. For the funds to which the deferral
applies, the Firm continues to apply other existing authoritative guid-
ance to determine whether such funds should be consolidated.
Assets held for clients in an agency or fiduciary capacity by the Firm
are not assets of JPMorgan Chase and are not included in the Con-
solidated Balance Sheets.
For reporting periods prior to January 1, 2010, there were two differ-
ent accounting frameworks applicable to SPEs: The qualifying special
purpose entity (“QSPE”) framework and the VIE framework. The
applicable framework depended on the nature of the entity and the
Firm’s relation to that entity. The QSPE framework was applicable
when an entity sold financial assets to an SPE meeting certain defined
criteria that were designed to ensure that the activities of the entity
were essentially predetermined at the inception of the vehicle and that
the transferor of the financial assets could not exercise control over the
entity and the assets therein. QSPEs were not consolidated by the
transferor or other counterparties as long as they did not have the
unilateral ability to liquidate or to cause the entity to no longer meet
the QSPE criteria. The Firm’s securitizations of residential and commer-
cial mortgages, credit card, automobile and student loans generally
were evaluated using the QSPE framework. For further details, see
Note 16 on pages 244–259 of this Annual Report.
Additionally, the other SPEs were evaluated using the VIE framework,
which was based on a risk and reward approach, and required a vari-
able interest holder (i.e., an investor or other counterparty to a VIE)
to consolidate the VIE if that party absorbed a majority of the ex-
pected losses of the VIE, received the majority of the expected
residual returns of the VIE, or both. In making the determination of
whether the Firm should consolidate a VIE, the Firm evaluated the
VIE’s design, capital structure and relationships among the variable
interest holders. If the Firm could not identify the party that consoli-
dates a VIE through a qualitative analysis, the Firm performed a
quantitative analysis, which computed and allocated expected losses
or residual returns to variable interest holders. The allocation of
expected cash flows in this analysis was based on the relative rights
and preferences of each variable interest holder in the VIE’s capital
structure. The Firm reconsidered whether it was the primary benefi-
ciary of a VIE only when certain defined events occurred.
Use of estimates in the preparation of consolidated finan-
cial statements
The preparation of Consolidated Financial Statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenue and expense, and
disclosures of contingent assets and liabilities. Actual results could
be different from these estimates.
Foreign currency translation
JPMorgan Chase revalues assets, liabilities, revenue and expense
denominated in non-U.S. currencies into U.S. dollars using applica-
ble exchange rates.
Gains and losses relating to translating functional currency financial
statements for U.S. reporting are included in other comprehensive
income/(loss) within stockholders’ equity. Gains and losses relating
to nonfunctional currency transactions, including non-U.S. opera-
tions where the functional currency is the U.S. dollar, are reported in
the Consolidated Statements of Income.
Statements of cash flows
For JPMorgan Chase’s Consolidated Statements of Cash Flows, cash
is defined as those amounts included in cash and due from banks.
Significant accounting policies
The following table identifies JPMorgan Chase’s other significant
accounting policies and the Note and page where a detailed descrip-
tion of each policy can be found.
Business changes and developments Note 2 Page 166
Fair value measurement Note 3 Page 170
Fair value option Note 4 Page 187
Derivative instruments Note 6 Page 191
Noninterest revenue Note 7 Page 199
Interest income and interest expense Note 8 Page 200
Pension and other postretirement employee
benefit plans Note 9 Page 201
Employee stock-based incentives Note 10 Page 210
Securities Note 12 Page 214
Securities financing activities Note 13 Page 219
Loans Note 14 Page 220
Allowance for credit losses Note 15 Page 239
Variable interest entities Note 16 Page 244
Goodwill and other intangible assets Note 17 Page 260
Premises and equipment Note 18 Page 263
Long-term debt Note 22 Page 265
Income taxes Note 27 Page 271
Off–balance sheet lending-related financial
instruments, guarantees and other
commitments Note 30 Page 275
Litigation Note 32 Page 282