JP Morgan Chase 2015 Annual Report Download - page 192

Notes to consolidated financial statements
182 JPMorgan Chase & Co./2015 Annual Report
activities. In general, the parties that make the most
significant decisions affecting the VIE (such as asset
managers, collateral managers, servicers, or owners of call
options or liquidation rights over the VIE’s assets) or have
the right to unilaterally remove those decision-makers are
deemed to have the power to direct the activities of a VIE.
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 interests, including debt and
equity investments, servicing fees, and derivatives 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.
In February 2010, the Financial Accounting Standards
Board (“FASB”) issued an amendment which deferred the
requirements of the accounting guidance for VIEs 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 accounting guidance to determine whether
such funds should be consolidated.
Use of estimates in the preparation of consolidated
financial statements
The preparation of the 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 applicable exchange rates.
Gains and losses relating to translating functional currency
financial statements for U.S. reporting are included in other
comprehensive income/(loss) (“OCI”) within stockholders’
equity. Gains and losses relating to nonfunctional currency
transactions, including non-U.S. operations where the
functional currency is the U.S. dollar, are reported in the
Consolidated statements of income.
Offsetting assets and liabilities
U.S. GAAP permits entities to present derivative receivables
and derivative payables with the same counterparty and the
related cash collateral receivables and payables on a net
basis on the Consolidated balance sheets when a legally
enforceable master netting agreement exists. U.S. GAAP
also permits securities sold and purchased under
repurchase agreements to be presented net when specified
conditions are met, including the existence of a legally
enforceable master netting agreement. The Firm has
elected to net such balances when the specified conditions
are met.
The Firm uses master netting agreements to mitigate
counterparty credit risk in certain transactions, including
derivatives transactions, repurchase and reverse
repurchase agreements, and securities borrowed and
loaned agreements. A master netting agreement is a single
contract with a counterparty that permits multiple
transactions governed by that contract to be terminated
and settled through a single payment in a single currency in
the event of a default (e.g., bankruptcy, failure to make a
required payment or securities transfer or deliver collateral
or margin when due after expiration of any grace period).
Upon the exercise of termination rights by the non-
defaulting party (i) all transactions are terminated, (ii) all
transactions are valued and the positive value or “in the
money” transactions are netted against the negative value
or “out of the money” transactions and (iii) the only
remaining payment obligation is of one of the parties to pay
the netted termination amount. Upon exercise of
repurchase agreement and securities loan default rights in
general (i) all transactions are terminated and accelerated,
(ii) all values of securities or cash held or to be delivered
are calculated, and all such sums are netted against each
other and (iii) the only remaining payment obligation is of
one of the parties to pay the netted termination amount.