Goldman Sachs 2003 Annual Report Download - page 67

GOLDMAN SACHS 2003 ANNUAL REPORT 65
Management’s Discussion and Analysis
RECENT ACCOUNTING DEVELOPMENTS
In June 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” The state-
ment specifies the accounting for certain employee termi-
nation benefits, contract termination costs and costs to
consolidate facilities or relocate employees and is effec-
tive for exit and disposal activities initiated after
December 31, 2002. Adoption of this statement did not
have a material effect on our financial condition, results
of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation
(FIN) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.” FIN No. 45
specifies the disclosures to be made about obligations
under certain issued guarantees and requires a liability to
be recognized for the fair value of a guarantee obliga-
tion. The recognition and measurement provisions of the
interpretation apply prospectively to guarantees issued
after December 31, 2002. The disclosure provisions
were effective beginning with our first fiscal quarter in
2003. Adoption of the recognition and measurement
provisions did not have a material effect on our financial
condition or results of operations.
In November 2002, the EITF reached a consensus on
EITF Issue No. 02-3 which precludes mark-to-market
accounting for energy-trading contracts that are not
derivatives pursuant to SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” We
adopted the provisions of EITF Issue No. 02-3 related to
energy-trading contracts as of the beginning of the first
quarter of fiscal 2003, and the effect of adoption was not
material to our financial condition, results of operations
or cash flows. EITF Issue No. 02-3 also communicates
the FASB staff’s view that the transaction price for a
derivative contract is the best information available to
estimate fair value at the inception of a contract when the
estimate is not based on other observable market data.
The application of the FASB staff’s view did not have a
material effect on our financial condition, results of oper-
ations or cash flows.
In December 2002, the FASB issued SFAS No. 148, which
amends the disclosure requirements of SFAS No. 123 and
provides alternative methods of transition for the adop-
tion of the fair-value method of SFAS No. 123. Effective
for fiscal 2003, we began to account for stock-based
employee compensation in accordance with the fair-value
method prescribed by SFAS No. 123 using the prospective
adoption method. Under this method of adoption, com-
pensation expense is recognized over the relevant service
period based on the fair value of stock options and
restricted stock units granted for fiscal 2003 and future
years. Compensation expense resulting from stock options
and restricted stock units granted for the years ended
November 2002, November 2001 and prior years was,
and continues to be, accounted for under the intrinsic-
value-based method prescribed by Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” Therefore, no compensation expense was,
or will be, recognized for those stock options that had
no intrinsic value on the date of grant. Adoption of SFAS
No. 123 did not have a material effect on our financial
condition, results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46,
“Consolidation of Variable Interest Entities.” In accor-
dance with its original provisions, we adopted FIN No. 46
immediately for all VIEs created after January 31, 2003.
For VIEs created before February 1, 2003 (pre-existing
VIEs), Goldman Sachs was initially required to adopt FIN
No. 46 no later than November 2003. In October 2003,
the FASB deferred the effective date of FIN No. 46 for pre-
existing VIEs to no later than February 2004 (our first
quarter of fiscal 2004). In December 2003, the FASB issued
a revision to FIN No. 46 (FIN No. 46-R), which incorpo-
rated the October 2003 deferral provisions and clarified
and revised the accounting guidance for VIEs. Under its
transition provisions, early application of FIN No. 46 or
FIN No. 46-R to some or all VIEs was permitted. We
applied either FIN No. 46 or FIN No. 46-R to substan-
tially all pre-existing VIEs in which we held a variable
interest as of November 2003. All VIEs, regardless of when
created, are required to be evaluated under FIN No. 46-R
no later than May 2004. The effect of our adoption of FIN
No. 46 and the early application of FIN No. 46-R to cer-
tain structures was not material to our financial condition,
results of operations or cash flows. Management is still
evaluating the effect of full adoption of FIN No. 46-R for
our second quarter of fiscal 2004, but does not currently
expect full adoption to have a material effect on our finan-
cial condition, results of operations or cash flows.