Goldman Sachs 2007 Annual Report Download - page 104

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Notes to Consolidated Financial Statements
■ Gains or losses that have been reported in level 3 resulting
from changes in level 1 or level 2 inputs are frequently offset
by gains or losses attributable to instruments classified in
level 1 or level 2 or by cash instruments reported in level 3 of
the fair value hierarchy.
The unrealized gains referenced above principally resulted
from changes in level 2 inputs, as opposed to changes in
level 3 inputs.
own credit spread on liabilities carried at fair value by discounting
future cash flows at a rate which incorporates the firm’s
observable credit spreads. As of November 2007, the difference
between the fair value and the aggregate contractual principal
amount of both long-term receivables and long-term debt
instruments (principal and non-principal protected) for which
the fair value option was elected was not material.
Derivative Contracts
The net unrealized gain on level 3 derivative contracts was
$4.54 billion for the year ended November 2007. Level 3 gains
and losses on derivative contracts should be considered in the
context of the following factors:
■ A derivative contract with level 1 and/or level 2 inputs is
classified as a level 3 financial instrument in its entirety if it
has at least one significant level 3 input.
■ If there is one significant level 3 input, the entire gain or loss
from adjusting only observable inputs (i.e., level 1 and
level 2) is still classified as level 3.
As of November 2007, the changes in the fair value of receivables
(including securities borrowed and resale agreements) for
which the fair value option was elected that were attributable
to changes in instrument-specific credit spreads were not material.
During 2007, the firm recognized gains of $216 million
attributable to the observable impact of the market’s widening
of the firm’s own credit spread on liabilities for which the fair
value option was elected. The firm calculates the impact of its
Level 3 Financial Assets and Liabilities
Year Ended November 2007
Cash Cash Derivative Unsecured Unsecured
Instruments Instruments Contracts Short-Term Long-Term Total
(in millions) – Assets – Liabilities – Net Borrowings Borrowings Gains
Balance, beginning of year $29,905 $(223) $ 580 $(3,253) $(135) N/A
Realized gains/(losses) 2,232
(1) (9)
(2) 1,713
(2) 167
(2) (7)
(2) $4,096
Unrealized gains/(losses)
relating to instruments still
held at the reporting date (2,292)
(1) (294)
(2) 4,543
(2) (3) (666)
(2) 22
(2) $1,313
Purchases, issuances and
settlements 22,561 (30) (1,365) (1,559) (567) N/A
Transfers in and/or out of level 3 1,045 2 (3,415) 1,040 (80) N/A
Balance, end of period $53,451 $(554) $ 2,056 $(4,271) $(767) N/A
(1) The aggregate amounts include approximately $(1.77) billion and $1.71 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the
consolidated statements of earnings.
(2) Substantially all is reported in “Trading and principal investments” in the consolidated statements of earnings.
(3) Principally resulted from changes in level 2 inputs.
102 Goldman Sachs 2007 Annual Report