Litigation
Certain actions have been filed against Merrill Lynch in connection with Merrill Lynch's business activities. Although the ultimate outcome of legal actions, arbitration proceedings, and claims pending against ML & Co. or its subsidiaries cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these actions will not have a material adverse effect on the financial condition of Merrill Lynch as set forth in the Consolidated Financial Statements, but may be material to Merrill Lynch's operating results for any particular period.
Recent Developments
New Accounting Pronouncements
In fiscal 2001, Merrill Lynch adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 requires Merrill Lynch to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. If the derivative qualifies for hedge accounting, depending on the nature of the hedge accounting relationship, changes in the fair value of the derivative will either be offset by the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recorded in other comprehensive income until the hedged item is recognized in earnings. Any portion of the derivative hedging instrument deemed "ineffective" under SFAS No. 133 will be immediately recognized in earnings. Derivatives that do not qualify for hedge accounting must be recorded at fair value, with changes in value reported in earnings.Prior to the adoption of SFAS No. 133, the majority of Merrill Lynch's derivatives were recognized at fair value in trading assets and liabilities, as they are entered into in a dealing capacity. However, Merrill Lynch also enters into derivatives to hedge its exposures relating to non-trading assets and liabilities, some of which, depending on the nature of the derivative and the related hedged item, were not carried at fair value. The new standard primarily impacts the accounting for derivatives used to hedge borrowings.
On adoption of SFAS No. 133, all existing hedge relationships were designated anew. The impact of adoption was not material.
In September 2000, the Financial Accounting Standards Board released SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a replacement of SFAS No. 125. Merrill Lynch has adopted those provisions of the statement that are required to be adopted as of December 29, 2000. These provisions relate primarily to the accounting and disclosures for collateral received or pledged in secured borrowing transactions. Other provisions of the statement are not required to be adopted until the second quarter of 2001. These provisions provide new guidance for determining whether a transfer of assets should be accounted for as a sale or a secured borrowing, and also change the accounting for certain securities lending transactions. Under the new provisions, Merrill Lynch will be required to recognize certain securities lending transactions on the Consolidated Balance Sheet in which Merrill Lynch acts as securities lender and receives securities (rather than cash) as collateral. Merrill Lynch is currently evaluating the impact of adoption.
