Goldman Sachs 2000 Annual Report Download - page 55

able period of time. Certain over-the-counter (OTC) deriv-
ative instruments are valued using pricing models that con-
sider, among other factors, current and contractual market
prices, time value, and yield curve and/or volatility factors
of the underlying positions. The fair value of the firm’s trad-
ing and nontrading assets and liabilities is discussed further
in Notes 4, 5 and 6.
Principal Investments
Principal investments are carried at fair value, generally
based upon quoted market prices or comparable substan-
tial third-party transactions. Where fair value is not readily
ascertainable, principal investments are recorded at cost or
management’s estimate of the realizable value.
The firm is entitled to receive merchant banking overrides
(i.e., an increased share of a fund’s income and gains) when
the return on the fund’s investments exceeds certain thresh-
old returns. Overrides are based on investment performance
over the life of each merchant banking fund, and future invest-
ment underperformance may require amounts previously
distributed to the firm to be returned to the funds. Accordingly,
overrides are recognized in earnings only when management
determines that the probability of return is remote. Overrides
are included in “Asset management and securities services”
on the consolidated statements of earnings.
Derivative Contracts
Derivatives used for trading purposes are reported at fair
value and are included in “Derivative contracts” on the
consolidated statements of financial condition. Gains and
losses on derivatives used for trading purposes are gener-
ally included in “Trading and principal investments” on the
consolidated statements of earnings.
Derivatives used for nontrading purposes include interest
rate futures contracts and interest rate and currency swap
agreements, which are primarily utilized to convert a sub-
stantial portion of the firm’s fixed rate debt into U.S. dollar-
based floating rate obligations. Gains and losses on
these derivatives are generally deferred and recognized
as adjustments to interest expense over the life of the der-
ivative contract. Gains and losses resulting from the early
termination of derivatives used for nontrading purposes
are generally deferred and recognized over the remaining
life of the underlying debt. If the underlying debt is termi-
nated prior to its stated maturity, gains and losses on these
transactions, including the associated hedges, are recognized
in earnings immediately.
Derivatives are reported on a net-by-counterparty basis
on the consolidated statements of financial condition where
management believes a legal right of setoff exists under an
enforceable netting agreement.
Property, Leasehold Improvements and Equipment
Depreciation and amortization generally are computed
using accelerated cost recovery methods for all property
and equipment and for leasehold improvements where the
term of the lease is greater than the economic useful life of
the asset. All other leasehold improvements are amortized
on a straight-line basis over the term of the lease. Certain
internal use software costs are capitalized and amortized
on a straight-line basis over the expected useful life.
Goodwill
The cost of acquired companies in excess of the fair value of
net assets at acquisition date is recorded as goodwill
and amortized over periods of 15 to 20 years on a straight-
line basis.
Investment Banking
Underwriting revenues and fees from mergers and acquisi-
tions and other corporate finance advisory assignments are
recorded when the underlying transaction is completed
under the terms of the engagement. Syndicate expenses
related to securities offerings in which the firm acts as an
underwriter or agent are deferred until the related revenue
is recognized.
Earnings Per Share
Earnings per share (EPS) is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128,
“Earnings Per Share.” Basic EPS is calculated by dividing
net earnings by the weighted average number of common
shares outstanding. Common shares outstanding includes
common stock and nonvoting common stock as well as restric-
ted stock units for which no future service is required
as a condition to the delivery of the underlying common
stock. Diluted EPS includes the determinants of basic EPS
and, in addition, reflects the dilutive effect of the common
stock deliverable pursuant to stock options and to restricted
53