Goldman Sachs 2003 Annual Report Download - page 38

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cash trading instruments – The fair values of cash
trading instruments are generally obtained from quoted
market prices in active markets, broker or dealer price quo-
tations, or alternative pricing sources with a reasonable
level of price transparency. The types of instruments valued
in this manner include U.S. government and agency securi-
ties, other sovereign government obligations, liquid mort-
gage products, investment-grade corporate bonds, listed
equities, money market securities, state, municipal and
provincial obligations, and physical commodities.
Certain cash trading instruments trade infrequently and,
therefore, have little or no price transparency. Such
Management’s Discussion and Analysis
36 GOLDMAN SACHS 2003 ANNUAL REPORT
CRITICAL ACCOUNTING POLICIES
Fair Value
“Financial instruments owned, at fair value” and
“Financial instruments sold, but not yet purchased, at
fair value” in the consolidated statements of financial
condition are carried at fair value or amounts that
approximate fair value, with related unrealized gains or
losses recognized in our results of operations. The use of
fair value to measure these financial instruments, with
FINANCIAL INSTRUMENTS BY CATEGORY
AS OF NOVEMBER
2003 2002
FINANCIAL FINANCIAL INSTRUMENTS FINANCIAL FINANCIAL INSTRUMENTS
INSTRUMENTS SOLD, BUT NOT YET INSTRUMENTS SOLD, BUT NOT YET
OWNED, AT PURCHASED, AT OWNED, AT PURCHASED, AT
(IN MILLIONS) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
Cash trading instruments $110,157 $ 60,813 $ 85,791 $44,552
Derivative contracts 45,733 41,886 42,205 38,921
Principal investments 3,755(1) —1,779 —
Total $159,645 $102,699 $129,775 $83,473
(1) Excludes assets of $1.07 billion in employee-owned merchant banking funds that were consolidated in 2003.
The following table sets forth the valuation of our cash trading instruments by level of price transparency:
CASH TRADING INSTRUMENTS BY PRICE TRANSPARENCY
AS OF NOVEMBER
2003 2002
FINANCIAL FINANCIAL INSTRUMENTS FINANCIAL FINANCIAL INSTRUMENTS
INSTRUMENTS SOLD, BUT NOT YET INSTRUMENTS SOLD, BUT NOT YET
OWNED, AT PURCHASED, AT OWNED, AT PURCHASED, AT
(IN MILLIONS) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
Quoted prices or alternative
pricing sources with
reasonable price transparency $102,306 $60,673 $81,125 $44,357
Little or no price transparency 7,851 140 4,666 195
Total $110,157 $60,813 $85,791 $44,552
related unrealized gains and losses recognized immedi-
ately in our results of operations, is fundamental to our
financial statements and is our most critical accounting
policy. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in
a forced or liquidation sale.
In determining fair value, we separate our financial instruments into three categories – cash (i.e., nonderivative) trading
instruments, derivative contracts and principal investments, as set forth in the following table:
instruments may include certain high-yield debt, corpo-
rate bank loans, mortgage whole loans and distressed
debt. We value these instruments using methodologies
such as the present value of known or estimated cash
flows and generally do not adjust underlying valuation
assumptions unless there is substantive evidence support-
ing a change in the value of the underlying instrument or
valuation assumptions (such as similar market transac-
tions, changes in financial ratios and changes in the credit
ratings of the underlying companies).