Morgan Stanley 2014 Annual Report Download - page 171

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company recognizes the expense for stock-based awards over the requisite service period. These awards
generally contain clawback and cancellation provisions. Certain awards provide the Company discretion to
cancel all or a portion of the award under specified circumstances. Compensation expense for those awards is
adjusted to fair value based upon changes in the share price of the Company’s common stock until conversion.
For anticipated year-end stock-based awards granted to employees expected to be retirement-eligible under
award terms that do not contain a future service requirement, the Company accrues the estimated cost of these
awards over the course of the calendar year preceding the grant date. The Company believes that this method of
recognition for retirement-eligible employees is preferable because it better reflects the period over which the
compensation is earned.
Employee Stock Trusts. The Company maintains and utilizes at its discretion, trusts, referred to as the
“Employee Stock Trusts”, in connection with certain stock-based compensation plans. The assets of the
Employee Stock Trusts are consolidated, and as such, are accounted for in a manner similar to treasury stock,
where the shares of common stock outstanding are offset by an equal amount in Common stock issued to
Employee Stock Trusts. The Company uses the grant-date fair value of stock-based compensation as the basis for
recognition of the assets in the Employee Stock Trusts. Subsequent changes in the fair value are not recognized
as the Company’s stock-based compensation plans do not permit diversification and must be settled by the
delivery of a fixed number of shares of the Company’s common stock.
Deferred Cash-Based Compensation. The Company also maintains various deferred cash-based compensation
plans for the benefit of certain current and former employees that provide a return to the participating employees
based upon the performance of various referenced investments. The Company often invests directly, as a
principal, in investments or other financial instruments to economically hedge its obligations under its deferred
cash-based compensation plans. Changes in value of such investments made by the Company are recorded in
Trading revenues and Investments revenues.
Compensation expense for deferred cash-based compensation plans is calculated based on the notional value of the
award granted, adjusted for upward and downward changes in the fair value of the referenced investments. For
unvested awards, the expense is recognized over the service period using the graded vesting attribution method.
Changes in compensation expense resulting from changes in the fair value of the referenced investments will
generally be offset by changes in the fair value of investments made by the Company. However, there may be a
timing difference between the immediate revenue recognition of gains and losses on the Company’s investments
and the deferred recognition of the related compensation expense over the vesting period. For vested awards with
only notional earnings on the referenced investments, the expense is fully recognized in the current period.
Translation of Foreign Currencies.
Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates of
exchange, and amounts recognized in the income statement are translated at the rate of exchange on the
respective date of recognition for each amount. Gains or losses resulting from translating foreign currency
financial statements, net of hedge gains or losses and related tax effects, are reflected in Accumulated other
comprehensive income (loss), a separate component of Morgan Stanley Shareholders’ equity on the Company’s
consolidated statements of financial condition. Gains or losses resulting from remeasurement of foreign currency
transactions are included in net income.
Goodwill and Intangible Assets.
The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events or
circumstances exist. The Company tests for impairment at the reporting unit level, which is generally at the level
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