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page 45 GOLDMAN SACHS ANNUAL REPORT 2001
OFF-BALANCE-SHEET ARRANGEMENTS
In the normal course of business, Goldman Sachs securitizes
commercial and residential mortgages and home equity loans,
government and corporate bonds, lease and trade receivables,
and other types of financial assets through unconsolidated
limited-purpose entities. We have also invested in investment
grade, real estate and mortgage-related assets through other
unconsolidated limited-purpose entities. Our financial interests
in, and derivative transactions with, unconsolidated limited-
purpose entities are accounted for at fair value, in the same man-
ner as transactions with non-limited-purpose entities. As of
November 2001, there were no material additional financial
commitments required from Goldman Sachs in respect of these
entities. See Note 4 to the consolidated financial statements
for additional information about our securitization activities.
In addition, Goldman Sachs facilitated the establishment of cer-
tain limited-purpose entities in connection with the construction
of an office complex in Jersey City, New Jersey, which we intend
to occupy. Future minimum rental commitments associated with
this office complex and a guarantee provided by Goldman Sachs
on related construction debt obligations are disclosed in Note 7
to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
“Financial instruments owned” and “Financial instruments sold,
but not yet purchased” on the consolidated statements of finan-
cial condition are carried at fair value or amounts that approxi-
mate fair value, with related unrealized gains or losses
recognized in our results of operations. The determination of
fair value is fundamental to our financial condition and results
of operations and, in certain circumstances, it requires manage-
ment to make complex judgments.
Fair value is based generally on listed market prices or broker or
dealer price quotations. If prices are not readily determinable or
if liquidating our positions is reasonably expected to affect mar-
ket prices, fair value is based on either internal valuation models
or management’s estimate of amounts that could be realized
under current market conditions, assuming an orderly liquida-
tion over a reasonable period of time. Certain financial instru-
ments, including OTC derivative instruments, are valued using
pricing models that consider, among other factors, contractual
and market prices, correlations, time value, credit, yield curve
volatility factors and/or prepayment rates of the underlying posi-
tions. The use of different pricing models and assumptions could
produce materially different estimates of fair value.
See Note 2 to the consolidated financial statements for a sum-
mary of our significant accounting policies.
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
141, “Business Combinations,” and SFAS No. 142, “Goodwill
and Other Intangible Assets.” SFAS No. 141 requires that com-
panies use the purchase method of accounting for all business
combinations initiated after June 30, 2001 and addresses the ini-
tial recognition and measurement of goodwill and other intangi-
ble assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible
assets acquired outside a business combination and the recogni-
tion and measurement of goodwill and other intangible assets
subsequent to acquisition. Under the new standards, goodwill
and intangible assets deemed to have indefinite lives will no
longer be amortized but, instead, will be tested at least annually
for impairment. Other intangible assets will continue to be
amortized over their useful lives. We adopted the new standards
on accounting for goodwill and other intangible assets on
December 1, 2001, the beginning of fiscal 2002. Application of
the non-amortization provisions of SFAS No. 142 is currently
expected to result in an increase in net earnings of approxi-
mately $95 million in 2002. Cash flows will not be affected.
During 2002, we will perform the required impairment tests of
goodwill and indefinite-lived intangible assets as of December 1,
2001. We do not expect these tests to have a material effect on
our financial condition or results of operations.