Goldman Sachs 2007 Annual Report Download - page 52

Management’s Discussion and Analysis
There can be no assurance that the assumptions, rule or structure
changes described above will result in sufficient cash flows to
avoid future impairment of our NYSE specialist rights. As of
November 30, 2007, the carrying value of our NYSE specialist
rights was $502 million. To the extent that there were to be
an impairment in the future, it could result in a significant
writedown in the carrying value of these specialist rights.
Use of Estimates
The use of generally accepted accounting principles requires
management to make certain estimates and assumptions. In
addition to the estimates we make in connection with fair value
measurements and the accounting for goodwill and identifiable
intangible assets, the use of estimates and assumptions is also
important in determining provisions for potential losses that may
arise from litigation and regulatory proceedings and tax audits.
We estimate and provide for potential losses that may arise out
of litigation and regulatory proceedings and tax audits to the
extent that such losses are probable and can be estimated, in
accordance with SFAS No. 5, “Accounting for Contingencies.”
Significant judgment is required in making these estimates and
our final liabilities may ultimately be materially different. Our
total estimated liability in respect of litigation and regulatory
proceedings is determined on a case-by-case basis and represents
an estimate of probable losses after considering, among other
factors, the progress of each case or proceeding, our experience
and the experience of others in similar cases or proceedings,
and the opinions and views of legal counsel. Given the inherent
difficulty of predicting the outcome of our litigation and
regulatory matters, particularly in cases or proceedings in
which substantial or indeterminate damages or fines are
sought, we cannot estimate losses or ranges of losses for cases or
proceedings where there is only a reasonable possibility that
a loss may be incurred. See “ — Legal Proceedings” in Part I,
Item 3 of the Annual Report on Form 10-K, for information
on our judicial, regulatory and arbitration proceedings.
A prolonged period of weakness in global equity markets and
the trading of securities in multiple markets and on multiple
exchanges could adversely impact our businesses and impair
the value of our goodwill and/or identifiable intangible assets.
In addition, certain events could indicate a potential impairment
of our identifiable intangible assets, including (i) changes
in market structure that could adversely affect our specialist
businesses (see discussion below), (ii) an adverse action or
assessment by a regulator, or (iii) adverse actual experience on the
contracts in our variable annuity and life insurance business.
During the fourth quarter of 2007, as a result of continuing
weak operating results in our NYSE specialist business, we
tested our NYSE specialist rights for impairment in accordance
with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” Under SFAS No. 144, an impairment
loss is recognized if the carrying amount of our NYSE specialist
rights exceeds the projected undiscounted cash flows of the
business over the estimated remaining useful life of our NYSE
specialist rights. Projected undiscounted cash flows exceeded the
carrying amount of our NYSE specialist rights, and accordingly,
we did not record an impairment loss.
We expect that the NYSE will enact numerous rule changes in
2008 that will further align its model with investor requirements
for speed and efficiency of execution and will establish specialists
as Designated Market Makers (DMMs). As DMMs, specialists
will retain their obligation to commit capital but for the first
time, specialists will be able to trade on parity with other market
participants. In addition, we understand that the NYSE plans to
introduce a reserve order system that will allow for anonymous
trade execution and is expected to increase liquidity and market
share. The new rules are expected to bolster the NYSE’s
competitive position by simplifying trading and advancing the
NYSE’s goal of increasing execution speeds.
In projecting the undiscounted cash flows of the business for
the purpose of performing our impairment test, we made several
important assumptions about the potential beneficial effects of
the expected rule and market structure changes described
above. Specifically, we assumed that:
■
overall equity trading volumes will continue to grow at a rate
consistent with recent historical trends;
■
the NYSE will be able to recapture approximately one-half
of the market share that it lost in 2007; and
■ we will increase the market share of our NYSE specialist
business and, as a DMM, the profitability of each share traded.
50 Goldman Sachs 2007 Annual Report