Goldman Sachs 2007 Annual Report Download - page 93

Notes to Consolidated Financial Statements
The firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is
a voting interest entity, a variable interest entity (VIE) or a
qualifying special-purpose entity (QSPE) under generally
accepted accounting principles.
■ VOTING INTEREST ENTITIES. Voting interest entities are
entities in which (i) the total equity investment at risk is
sufficient to enable the entity to finance its activities
independently and (ii) the equity holders have the obligation
to absorb losses, the right to receive residual returns and the
right to make decisions about the entity’s activities. Voting
interest entities are consolidated in accordance with
Accounting Research Bulletin (ARB) No. 51, “Consolidated
Financial Statements,” as amended. ARB No. 51 states that
the usual condition for a controlling financial interest in an
entity is ownership of a majority voting interest. Accordingly,
the firm consolidates voting interest entities in which it has
a majority voting interest.
■ VARIABLE INTEREST ENTITIES.
VIEs are entities that lack
one or more of the characteristics of a voting interest entity.
A controlling financial interest in a VIE is present when an
enterprise has a variable interest, or a combination of
variable interests, that will absorb a majority of the VIE’s
expected losses, receive a majority of the VIE’s expected
residual returns, or both. The enterprise with a controlling
financial interest, known as the primary beneficiary,
consolidates the VIE. In accordance with Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 46-R,
“Consolidation of Variable Interest Entities,” the firm
consolidates VIEs for which it is the primary beneficiary. The
firm determines whether it is the primary beneficiary of a VIE
by first performing a qualitative analysis of the VIE that
includes a review of, among other factors, its capital
structure, contractual terms, which interests create or absorb
variability, related party relationships and the design of the
VIE. Where qualitative analysis is not conclusive, the firm
performs a quantitative analysis. For purposes of allocating
a VIE’s expected losses and expected residual returns to its
variable interest holders, the firm utilizes the “top down”
method. Under that method, the firm calculates its share of
the VIE’s expected losses and expected residual returns using
the specific cash flows that would be allocated to it, based on
contractual arrangements and/or the firm’s position in the
capital structure of the VIE, under various probability-
weighted scenarios.
■
QSPES. QSPEs are passive entities that are commonly used in
mortgage and other securitization transactions. Statement of
Financial Accounting Standards (SFAS) No. 140, “Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” sets forth the criteria an
entity must satisfy to be a QSPE. These criteria include the
NOTE 1
Description of Business
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware
corporation, together with its consolidated subsidiaries
(collectively, the firm), is a leading global investment banking,
securities and investment management firm that provides a
wide range of services worldwide to a substantial and diversified
client base that includes corporations, financial institutions,
governments and high-net-worth individuals.
The firm’s activities are divided into three segments:
■ INVESTMENT BANKING.
The firm provides a broad range of
investment banking services to a diverse group of corporations,
financial institutions, investment funds, governments and
individuals.
■
TRADING AND PRINCIPAL INVESTMENTS. The firm facilitates
client transactions with a diverse group of corporations,
financial institutions, investment funds, governments and
individuals and takes proprietary positions through market
making in, trading of and investing in fixed income and
equity products, currencies, commodities and derivatives on
these products. In addition, the firm engages in market-
making and specialist activities on equities and options
exchanges and clears client transactions on major stock,
options and futures exchanges worldwide. In connection with
the firm’s merchant banking and other investing activities, the
firm makes principal investments directly and through funds
that the firm raises and manages.
■ ASSET MANAGEMENT AND SECURITIES SERVICES.
The firm
provides investment advisory and financial planning services
and offers investment products (primarily through separately
managed accounts and commingled vehicles, such as mutual
funds and private investment funds) across all major asset
classes to a diverse group of institutions and individuals
worldwide and provides prime brokerage services, financing
services and securities lending services to institutional clients,
including hedge funds, mutual funds, pension funds and
foundations, and to high-net-worth individuals worldwide.
NOTE 2
Significant Accounting Policies
Basis of Presentation
These consolidated financial statements include the accounts
of Group Inc. and all other entities in which the firm has
a controlling financial interest. All material intercompany
transactions and balances have been eliminated.
91Goldman Sachs 2007 Annual Report