Goldman Sachs 2003 Annual Report Download - page 80

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Notes to Consolidated Financial Statements
78 GOLDMAN SACHS 2003 ANNUAL REPORT
Earnings Per Share
Basic earnings per share (EPS) is calculated by dividing
net earnings by the weighted average number of common
shares outstanding. Common shares outstanding includes
common stock and restricted stock units for which no
future service is required as a condition to the delivery of
the underlying common stock. Diluted EPS includes the
determinants of basic EPS and, in addition, reflects the
dilutive effect of the common stock deliverable pursuant
to stock options and restricted stock units for which
future service is required as a condition to the delivery of
the underlying common stock.
Stock-Based Compensation
Effective for fiscal 2003, the firm began to account for
stock-based employee compensation in accordance with
the fair-value method prescribed by SFAS No. 123,
“Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure,” using the
prospective adoption method. Under this method of
adoption, compensation 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. No unearned compensation is included
in “Shareholders’ equity” for such stock options and
restricted stock units granted. Rather, such stock options
and restricted stock units are included in “Shareholders’
equity” under SFAS No. 123 when services required
from employees in exchange for the awards are rendered
and expensed. Adoption of SFAS No. 123 did not have
a material effect on the firm’s financial condition, results
of operations or cash flows.
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 APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” as permitted
by SFAS No. 123. Therefore, no compensation expense
was, or will be, recognized for those unmodified stock
options issued for years prior to fiscal 2003 that had
no intrinsic value on the date of grant. Compensation
expense for restricted stock units issued for the years prior
to fiscal 2003 was, and continues to be, recognized over
the relevant service periods using amortization schedules
based on the applicable vesting provisions.
If the firm were to recognize compensation expense over the relevant service period under the fair-value method of SFAS
No. 123 with respect to stock options granted for the year ended November 2002 and all prior years, net earnings
would have decreased, resulting in pro forma net earnings and EPS as presented below:
YEAR ENDED NOVEMBER
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
Net earnings, as reported $3,005 $2,114 $2,310
Add: Stock-based employee compensation expense, net of related tax
effects, included in reported net earnings 458 416 499
Deduct: Stock-based employee compensation expense, net of related tax
effects, determined under the fair-value method for all awards (782) (785) (844)
Pro forma net earnings $2,681 $1,745 $1,965
EPS, as reported
Basic $6.15 $ 4.27 $ 4.53
Diluted 5.87 4.03 4.26
Pro forma EPS
Basic $5.49 $ 3.52 $ 3.86
Diluted 5.24 3.32 3.63