Goldman Sachs 2007 Annual Report Download - page 96

Notes to Consolidated Financial Statements
Securities borrowed and loaned within Trading and Principal
Investments, which are related to the firm’s matched book
and certain firm financing activities, are recorded at fair value
as allowed by SFAS No. 159. Prior to the adoption of SFAS
No. 159, these transactions were recorded based on the
amount of cash collateral advanced or received plus accrued
interest. These securities borrowed and loaned transactions
are generally valued based on inputs with reasonable levels
of price transparency and are classified within level 2 of the
fair value hierarchy.
■ OTHER SECURED FINANCINGS. In addition to repurchase
agreements and securities loaned, the firm funds assets
through the use of other secured financing arrangements and
pledges financial instruments and other assets as collateral in
these transactions. SFAS No. 159 has been adopted for those
financings for which the use of fair value would eliminate
non-economic volatility in earnings from using different
measurement attributes (i.e., assets recorded at fair value with
related nonrecourse financings recorded based on the amount
of cash received plus accrued interest), primarily transfers
accounted for as financings rather than sales under SFAS
No. 140 and debt raised through the firm’s William Street
program. These other secured financing transactions are
generally valued based on inputs with reasonable levels of
price transparency and are classified within level 2 of the fair
value hierarchy. Other secured financings that are not
recorded at fair value are recorded based on the amount of
cash received plus accrued interest. See Note 3 for further
information regarding other secured financings.
HYBRID FINANCIAL INSTRUMENTS. Hybrid financial instruments
are instruments that contain bifurcatable embedded derivatives
under SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” and do not require settlement
by physical delivery of non-financial assets (e.g., physical
commodities). If the firm elects to bifurcate the embedded
derivative, it is accounted for at fair value and the host
contract is accounted for at amortized cost, adjusted for the
effective portion of any fair value hedge accounting relationships.
If the firm does not elect to bifurcate, the entire hybrid financial
instrument is accounted for at fair value under SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments — a n
amendment of FASB Statements No. 133 and 140.” The
primary reasons for electing the fair value option for hybrid
financial instruments are mitigating volatility in earnings from
using different measurement attributes, simplification and cost-
benefit considerations. See Notes 3 and 4 for additional
information about hybrid financial instruments.
TRANSFERS OF FINANCIAL ASSETS. In general, transfers of
financial assets are accounted for as sales under SFAS No. 140
when the firm has relinquished control over the transferred
assets. For transfers accounted for as sales, any related gains
or losses are recognized in net revenues. Transfers that are not
third-party pricing services and/or broker or dealer quotations,
or other empirical market data. In circumstances where the
firm cannot verify the model value to market transactions, it
is possible that a different valuation model could produce a
materially different estimate of fair value.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on available market
evidence. In the absence of such evidence, management’s best
estimate is used.
COLLATERALIZED AGREEMENTS AND FINANCINGS. Collateralized
agreements consist of resale agreements and securities borrowed.
Collateralized financings consist of repurchase agreements,
securities loaned and other secured financings. Interest on
collateralized agreements and collateralized financings is
recognized in “Interest income” or “Interest expense,” respectively,
over the life of the transaction.
■
RESALE AND REPURCHASE AGREEMENTS. Financial instruments
purchased under agreements to resell and financial
instruments sold under agreements to repurchase, principally
U.S. government, federal agency and investment-grade
sovereign obligations, represent collateralized financing
transactions. The firm receives financial instruments
purchased under agreements to resell, makes delivery of
financial instruments sold under agreements to repurchase,
monitors the market value of these financial instruments on
a daily basis and delivers or obtains additional collateral as
appropriate. Resale and repurchase agreements are carried in
the consolidated statements of financial condition at fair
value as allowed by SFAS No. 159. Prior to the adoption of
SFAS No. 159, these transactions were recorded at contractual
amounts plus accrued interest. Resale and repurchase
agreements are generally valued based on inputs with
reasonable levels of price transparency and are classified
within level 2 of the fair value hierarchy. Resale and repurchase
agreements are presented on a net-by-counterparty basis
when the requirements of FIN No. 41, “Offsetting of Amounts
Related to Certain Repurchase and Reverse Repurchase
Agreements,” or FIN No. 39, “Offsetting of Amounts Related
to Certain Contracts,” are satisfied.
■ SECURITIES BORROWED AND LOANED. Securities borrowed
and loaned are generally collateralized by cash, securities or
letters of credit. The firm receives securities borrowed, makes
delivery of securities loaned, monitors the market value
of securities borrowed and loaned, and delivers or obtains
additional collateral as appropriate. Securities borrowed and
loaned within Securities Services, relating to both customer
activities and, to a lesser extent, certain firm financing
activities, are recorded based on the amount of cash collateral
advanced or received plus accrued interest. As these
arrangements are generally transacted on-demand, they
exhibit little, if any, sensitivity to changes in interest rates.
94 Goldman Sachs 2007 Annual Report