Goldman Sachs 2000 Annual Report Download - page 56

stock units for which future service is required as a condition
to the delivery of the underlying common stock.
Stock-Based Compensation
The firm has elected to account for stock-based employee
compensation plans in accordance with Accounting
Principles Board Opinion (APB) No. 25, “Accounting for
Stock Issued to Employees,” as permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation.” In accor-
dance with APB No. 25, compensation expense is not recog-
nized for stock options that have no intrinsic value on the
date of grant. Compensation expense is recognized imme-
diately for restricted stock units for which future service is
not required as a condition to the delivery of the underlying
shares of common stock. For restricted stock units with
future service requirements, compensation expense is
recognized over the relevant vesting period using an accel-
erated amortization methodology.
Income Taxes
The firm accounts for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes,” which requires the
recognition of tax benefits or expenses on the temporary
differences between the financial reporting and tax bases of
its assets and liabilities. As a partnership, the firm was pri-
marily subject to unincorporated business taxes and taxes
in foreign jurisdictions on certain of its operations. As a cor-
poration, the earnings of the firm are subject to U.S. federal,
foreign, state and local taxes. As a result of its conversion
to corporate form, the firm recognized the tax effect of the
change in its income tax rate on both its deferred tax assets
and liabilities and the earnings attributable to the period
from May 7, 1999 to the end of fiscal year 1999. The firm’s
tax assets and liabilities are presented as a component
of “Other assets” and “Other liabilities and accrued
expenses,” respectively, on the consolidated statements of
financial condition.
Foreign Currency Translation
Assets and liabilities denominated in non-U.S. currencies
are translated at rates of exchange prevailing on the date of
the statement of financial condition, and revenues and
expenses are translated at average rates of exchange for
the fiscal year. Gains or losses on translation of the financial
statements of a non-U.S. operation, where the functional
currency is other than the U.S. dollar, are reflected as a
separate component of equity. Gains or losses on foreign
currency transactions are included in the consolidated
statements of earnings.
Note 3/Spear, Leeds & Kellogg
On October 31, 2000, the firm completed its combination
with SLK LLC (SLK), a leader in securities clearing and exe-
cution, floor-based market making and off-floor market
making. The combination was accounted for under the pur-
chase method of accounting for business combinations. In
exchange for the membership interests in SLK and subordi-
nated debt of certain retired members, the firm issued 35.3
million shares of common stock valued at $3.5 billion,
issued $149 million in debentures and paid $2.1 billion in
cash. The purchase price has been preliminarily allocated
to tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as
of the effective date of the combination. The excess of con-
sideration paid over the estimated fair value of net assets
acquired has been recorded as goodwill. Goodwill and iden-
tifiable intangible assets of approximately $4.0 billion will
be amortized as a charge to earnings over a weighted
average life of approximately 20 years. The final allocation
of the purchase price will be determined after appraisals
and a comprehensive evaluation of the fair value of the SLK
assets acquired and liabilities assumed are completed. The
firm does not expect the change in amortization expense to
be material.
As part of the combination with SLK, the firm established a
$702 million retention pool of restricted stock units for all
SLK employees. A charge of $290 million ($180 million after
taxes) related to restricted stock units for which future ser-
vice was not required as a condition to the delivery of the
underlying shares of common stock was included in the
firm’s operating results in the fourth quarter of 2000. The
remaining restricted stock units, for which future service is
required, will be amortized over the five-year service
period following the date of the consummation of the combi-
nation as follows: 25%, 25%, 25%, 18% and 7% in years
one, two, three, four and five, respectively.
54 Goldman Sachs Annual Report 2000