JP Morgan Chase 2012 Annual Report Download - page 183

Notes to consolidated financial statements
JPMorgan Chase & Co./2012 Annual Report 193
Note 1 – Basis of presentation
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a
financial holding company incorporated under Delaware law
in 1968, is a leading global financial services firm and one
of the largest banking institutions in the United States of
America (“U.S.”), with operations worldwide. The Firm is a
leader in investment banking, financial services for
consumers and small business, commercial banking,
financial transaction processing, asset management and
private equity. For a discussion of the Firm’s business
segments, see Note 33 on pages 326–329 of this Annual
Report.
The accounting and financial reporting policies of JPMorgan
Chase and its subsidiaries conform to accounting principles
generally accepted in the U.S. (“U.S. GAAP”). Additionally,
where applicable, the policies conform to the accounting
and reporting guidelines prescribed by regulatory
authorities.
Certain amounts reported in prior periods have been
reclassified to conform with the current presentation.
Consolidation
The Consolidated Financial Statements include the accounts
of JPMorgan Chase and other entities in which the Firm has
a controlling financial interest. All material intercompany
balances and transactions have been eliminated. The Firm
determines whether it has a controlling financial interest in
an entity by first evaluating whether the entity is a voting
interest entity or a variable interest entity (“VIE”).
Voting Interest Entities
Voting interest entities are entities that have sufficient
equity and provide the equity investors voting rights that
enable them to make significant decisions relating to the
entity’s operations. For these types of entities, the Firm’s
determination of whether it has a controlling interest is
primarily based on the amount of voting equity interests
held. Entities in which the Firm has a controlling financial
interest, through ownership of the majority of the entities’
voting equity interests, or through other contractual rights
that give the Firm control, are consolidated by the Firm.
Investments in companies in which the Firm has significant
influence over operating and financing decisions (but does
not own a majority of the voting equity interests) are
accounted for (i) in accordance with the equity method of
accounting (which requires the Firm to recognize its
proportionate share of the entity’s net earnings), or (ii) at
fair value if the fair value option was elected at the
inception of the Firm’s investment. These investments are
generally included in other assets, with income or loss
included in other income.
Certain Firm-sponsored asset management funds are
structured as limited partnerships or limited liability
companies. For many of these entities, the Firm is the
general partner or managing member, but the non-affiliated
partners or members have the ability to remove the Firm as
the general partner or managing member without cause
(i.e., kick-out rights), based on a simple majority vote, or
the non-affiliated partners or members have rights to
participate in important decisions. Accordingly, the Firm
does not consolidate these funds. In the limited cases where
the nonaffiliated partners or members do not have
substantive kick-out or participating rights, the Firm
consolidates the funds.
The Firm’s investment companies make investments in both
publicly-held and privately-held entities, including
investments in buyouts, growth equity and venture
opportunities. These investments are accounted for under
investment company guidelines and accordingly,
irrespective of the percentage of equity ownership interests
held, are carried on the Consolidated Balance Sheets at fair
value, and are recorded in other assets.
Variable Interest Entities
VIEs are entities that, by design, either (1) lack sufficient
equity to permit the entity to finance its activities without
additional subordinated financial support from other
parties, or (2) have equity investors that do not have the
ability to make significant decisions relating to the entity’s
operations through voting rights, or do not have the
obligation to absorb the expected losses, or do not have the
right to receive the residual returns of the entity.
The most common type of VIE is a special purpose entity
(“SPE”). SPEs are commonly used in securitization
transactions in order to isolate certain assets and distribute
the cash flows from those assets to investors. The basic SPE
structure involves a company selling assets to the SPE; the
SPE funds the purchase of those assets by issuing securities
to investors. The legal documents that govern the
transaction specify how the cash earned on the assets must
be allocated to the SPE’s investors and other parties that
have rights to those cash flows. SPEs are generally
structured to insulate investors from claims on the SPE’s
assets by creditors of other entities, including the creditors
of the seller of the assets.
The primary beneficiary of a VIE (i.e., the party that has a
controlling financial interest) is required to consolidate the
assets and liabilities of the VIE. The primary beneficiary is
the party that has both (1) the power to direct the activities
of the VIE that most significantly impact the VIE’s economic
performance; and (2) through its interests in the VIE, the
obligation to absorb losses or the right to receive benefits
from the VIE that could potentially be significant to the VIE.