Goldman Sachs 2003 Annual Report Download - page 76

Notes to Consolidated Financial Statements
74 GOLDMAN SACHS 2003 ANNUAL REPORT
voting interest. The firm’s principal U.S. and interna-
tional subsidiaries include Goldman, Sachs & Co.
(GS&Co.), J. Aron & Company and Spear, Leeds &
Kellogg, L.P. (SLK) in New York, Goldman Sachs
International (GSI) in London and Goldman Sachs
(Japan) Ltd. (GSJL) in Tokyo.
As defined in Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46, “Consolidation of
Variable Interest Entities,” VIEs are entities that lack one
or more of the characteristics of a voting interest entity
described above. Prior to the issuance of FIN No. 46, VIEs
were commonly referred to as SPEs. FIN No. 46 states
that a controlling financial interest in an entity is present
when an enterprise has a variable interest, or combination
of variable interests, that will absorb a majority of the
entity’s expected losses, receive a majority of the entity’s
expected residual returns, or both. The enterprise with a
controlling financial interest, known as the primary bene-
ficiary, consolidates the VIE under FIN No. 46.
In January 2003, the FASB issued FIN No. 46. In accor-
dance with its original provisions, the firm adopted FIN
No. 46 immediately for all VIEs created after January 31,
2003. For VIEs created before February 1, 2003 (pre-
existing VIEs), the firm 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 (the
firm’s first quarter of fiscal 2004). In December 2003, the
FASB issued a revision to FIN No. 46 (FIN No. 46-R),
which incorporated 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. The firm applied either FIN No. 46 or FIN
No. 46-R to substantially all pre-existing VIEs in which
it 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.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities,” the firm does not consolidate QSPEs. QSPEs
are passive entities that hold financial assets transferred
to them and are commonly used in mortgage and other
securitization transactions. Prior to the adoption of FIN
No. 46 or FIN No. 46-R, as applicable, the firm consoli-
dated all nonqualifying SPEs if the firm controlled the
SPE, held a majority of the SPE’s substantive risks and
rewards, or had transferred assets to the SPE and inde-
pendent investors had not made a substantive majority
equity investment in legal form.
When the firm does not have a controlling financial inter-
est in an entity but exerts significant influence over the
entity’s operating and financial policies (generally defined
as owning a voting or economic interest of 20% to 50%),
the firm accounts for its investment in accordance with
the equity method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 18,
“The Equity Method of Accounting for Investments in
Common Stock.”
If the firm does not have a controlling financial interest
in, or exert significant influence over, an entity, the firm
accounts for its investment at fair value.
The firm’s financial interests in, and derivative transac-
tions with, nonconsolidated SPEs and VIEs are accounted
for at fair value, in the same manner as other financial
instruments. As of November 2003, the firm had no
material additional financial commitments or guarantees
in respect of these entities.
The firm also has formed numerous nonconsolidated
merchant banking funds with third-party investors that
are typically organized as limited partnerships. The firm
acts as general partner for these funds and does not hold
a majority of the economic interests in any fund. Where
the firm holds an interest that is significant to a fund, it is
subject to removal as general partner. The firm’s aggre-
gate investments in funds in which it holds a significant
interest was $1.57 billion and $1.42 billion as of
November 2003 and November 2002, respectively. Such
fund investments are included in “Financial instruments
owned, at fair value” in the consolidated statements of
financial condition. Total assets in these funds were
approximately $13 billion as of September 30, 2003 (the
most recent investment fund reporting date).
These consolidated financial statements have been pre-
pared in accordance with generally accepted accounting
principles that require management to make certain esti-
mates and assumptions regarding fair value measure-
ment, the accounting for goodwill and identifiable
intangible assets, the provision for potential losses that
may arise from litigation and regulatory proceedings, and
other matters that affect the consolidated financial state-
ments and related disclosures. These estimates and
assumptions are based on the best available information;
nonetheless, actual results could be materially different
from these estimates.
Unless otherwise stated herein, all references to
November 2003, November 2002 and November 2001
refer to the firm’s fiscal years ended, or the dates, as the
context requires, November 28, 2003, November 29,