Morgan Stanley 2015 Annual Report Download - page 78

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis.
At December 31, 2015 and December 31, 2014, certain of the Company’s assets and liabilities were measured at fair value
on a non-recurring basis, primarily relating to loans, other investments, premises, equipment and software costs, intangible
assets, other assets and other liabilities, and accrued expenses. The Company incurs losses or gains for any adjustments of
these assets to fair value. A downturn in market conditions could result in impairment charges in future periods.
For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using various valuation
approaches. The same hierarchy as described above, which maximizes the use of observable inputs and minimizes the use of
unobservable inputs by generally requiring that the observable inputs be used when available, is used in measuring fair value
for these items.
See Note 3 to the consolidated financial statements in Item 8 for further information on assets and liabilities that are
measured at fair value on a non-recurring basis.
Fair Value Control Processes.
The Company employs control processes to validate the fair value of its financial instruments, including those derived from
pricing models. These control processes are designed to ensure that the values used for financial reporting are based on
observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed
to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.
See Note 2 to the consolidated financial statements in Item 8 for additional information regarding the Company’s valuation
policies, processes and procedures.
Goodwill and Intangible Assets.
Goodwill.
The Company tests goodwill for impairment on an annual basis on July 1 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 of or one
level below its business segments. Goodwill no longer retains its association with a particular acquisition once it has been
assigned to a reporting unit. As such, all the activities of a reporting unit, whether acquired or organically developed, are
available to support the value of the goodwill. For both the annual and interim tests, the Company has the option to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.
If after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value
of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However,
if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test. Goodwill
impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the
estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the
estimated fair value is below carrying value, however, further analysis is required to determine the amount of the
impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is determined that it is
more likely than not the goodwill is impaired, further analysis is required.
The estimated fair value of the reporting units is derived based on valuation techniques the Company believes market
participants would use for each of the reporting units. The estimated fair value is generally determined by utilizing a
discounted cash flow methodology or methodologies that incorporate price-to-book and price-to-earnings multiples of certain
comparable companies. At each annual goodwill impairment testing date, each of the Company’s reporting units with
goodwill had a fair value that was substantially in excess of its carrying value.
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