Goldman Sachs 2003 Annual Report Download - page 81

Notes to Consolidated Financial Statements
GOLDMAN SACHS 2003 ANNUAL REPORT 79
operations. See Note 6 for further information regarding
the firm’s commitments, contingencies and guarantees.
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.” The firm
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 the firm’s financial condition, results of oper-
ations or cash flows. EITF Issue No. 02-3 also communi-
cates 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 the firm’s financial condition, results of
operations or cash flows.
As discussed above in “— Basis of Presentation,” in
January 2003, the FASB issued FIN No. 46 and, in
December 2003, the FASB issued FIN No. 46-R. The
effect of the firm’s adoption of FIN No. 46 and the early
application of FIN No. 46-R to certain structures was not
material to the firm’s financial condition, results of oper-
ations or cash flows. Management is still evaluating the
effect of full adoption of FIN No. 46-R for the firm’s sec-
ond quarter of fiscal 2004, but does not currently expect
full adoption to have a material effect on the firm’s finan-
cial condition, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments
and Hedging Activities.” SFAS No. 149 amends and clar-
ifies the accounting for derivative instruments, including
certain derivative instruments embedded in other con-
tracts, and for hedging activities. In addition, the state-
ment clarifies when a contract is a derivative and when a
derivative contains a financing component that warrants
special reporting in the statement of cash flows. As
required, the firm adopted SFAS No. 149 prospectively for
contracts entered into or modified, and hedging relation-
ships designated, after June 30, 2003. Adoption did not
have a material effect on the firm’s financial condition,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with charac-
teristics of both liabilities and equity and imposes certain
Income Taxes
Deferred tax assets and liabilities are recognized for tem-
porary differences between the financial reporting and
tax bases of the firm’s assets and liabilities. Valuation
allowances are established to reduce deferred tax assets
to the amount that more likely than not will be realized.
The firm’s tax assets and liabilities are presented as a
component of “Other assets” and “Other liabilities and
accrued expenses,” respectively, in the consolidated state-
ments of financial condition.
Foreign Currency Translation
Assets and liabilities denominated in non-U.S. currencies
are translated at rates of exchange prevailing on the date
of the consolidated statement of financial condition, and
revenues and expenses are translated at average rates of
exchange for the fiscal year. Gains or losses on translation
of the financial statements of a non-U.S. operation, when
the functional currency is other than the U.S. dollar, are
included, net of hedges, on the consolidated statements of
comprehensive income. Hedge effectiveness is assessed
based on changes in forward exchange rates; accordingly,
forward points are reflected as a component of the cur-
rency translation adjustment in the consolidated state-
ments of comprehensive income. Foreign currency
remeasurement gains or losses on transactions in non-
functional currencies are included in the consolidated
statements of earnings.
Recent Accounting Developments
In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities.” The statement specifies the accounting for
certain employee termination benefits, contract termina-
tion costs and costs to consolidate facilities or relocate
employees and is effective for exit and disposal activities
initiated after December 31, 2002. Adoption of this
statement did not have a material effect on the firm’s
financial condition, results of operations or cash flows.
In November 2002, the FASB issued 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 obligation. The recognition and measurement
provisions of the interpretation apply prospectively to
guarantees issued after December 31, 2002. The firm
adopted the disclosure provisions effective beginning with
the firm’s first fiscal quarter in 2003. Adoption of the
recognition and measurement provisions did not have a
material effect on the firm’s financial condition or results of