MORGAN STANLEY

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies and for further information on accounting updates adopted in the prior year, see Note 2 to the financial statements in the 2025 Form 10-K.

During the six months ended June 30, 2026, there were no significant updates to the Firm’s significant accounting policies, other than as described below.

In the first quarter of 2026, the Firm began using derivatives to hedge certain of its DCP awards in the Wealth Management business segment. The Firm has accordingly updated certain relevant accounting policies to address such hedging derivatives as described below.

Hedge Accounting

Cash Flow Hedges—Equity Price Risk

The Firm designated total return swaps as hedges of the variability in forecasted cash flows from the majority of unvested DCP obligations due to variability in the underlying DCP investments. The Firm uses regression analysis to perform an ongoing prospective and retrospective assessment of the effectiveness of these hedging relationships.

Changes in the fair value of these hedging derivatives designated as cash flow hedges are recorded in OCI and subsequently reclassified into Compensation and benefits expense in the same period that the related DCP award vests and the related Compensation and benefits expense is recognized.

Other Hedges

In addition to hedges that are designated and qualify for cash flow hedge accounting, the Firm uses derivatives to economically hedge equity price risk primarily associated with vested DCP awards. The Firm presents changes in the fair value of the derivatives related to economic hedges of DCP awards in Compensation and benefits expense. Previously, the Firm economically hedged the awards primarily with cash instruments whereby changes in the fair value of the hedges were recorded in Trading revenues.

Deferred Compensation

Deferred Cash-Based Compensation

Compensation expense for DCP awards is calculated based on the notional value of the award granted, adjusted for changes in the fair value of the referenced investments that employees select. Compensation expense is recognized over the vesting period relevant to each separately vesting portion of deferred awards.

The majority of unvested DCP awards are subject to cash flow hedge accounting to mitigate the recognition timing difference on compensation expenses. Vested DCP awards are economically hedged using derivatives. For more information regarding cash flow hedge accounting for DCP awards, refer to “Hedge Accounting – Cash Flow Hedges – Equity Price Risk” herein. For more information on economic hedges for DCP awards, refer to “Other Hedges” herein.