Goldman Sachs 2007 Annual Report Download - page 97

Notes to Consolidated Financial Statements
ASSET MANAGEMENT. Management fees are recognized over the
period that the related service is provided based upon average
net asset values. In certain circumstances, the firm is also
entitled to receive incentive fees based on a percentage of a
fund’s return or when the return on assets under management
exceeds specified benchmark returns or other performance targets.
Incentive fees are generally based on investment performance
over a 12-month period and are subject to adjustment prior to
the end of the measurement period. Accordingly, incentive fees
are recognized in the consolidated statements of earnings when
the measurement period ends. Asset management fees and
incentive fees are included in “Asset management and securities
services” in the consolidated statements of earnings.
Share-Based Compensation
In the first quarter of 2006, the firm adopted SFAS No. 123-R,
“Share-Based Payment,” which is a revision to SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS No. 123-R
focuses primarily on accounting for transactions in which an
entity obtains employee services in exchange for share-based
payments. Under SFAS No. 123-R, the cost of employee
services received in exchange for a share-based award is generally
measured based on the grant-date fair value of the award.
Under SFAS No. 123-R, share-based awards that do not
require future service (i.e., vested awards, including awards
granted to retirement-eligible employees) are expensed
immediately. Share-based employee awards that require future
service are amortized over the relevant service period. The firm
adopted SFAS No. 123-R under the modified prospective
adoption method. Under that method of adoption, the provisions
of SFAS No. 123-R are generally applied only to share-based
awards granted subsequent to adoption. Share-based awards
held by employees that were retirement-eligible on the date of
adoption of SFAS No. 123-R must continue to be amortized
over the stated service period of the award (and accelerated if
the employee actually retires). SFAS No. 123-R requires
expected forfeitures to be included in determining share-based
employee compensation expense.
The firm pays cash dividend equivalents on outstanding
restricted stock units. Dividend equivalents paid on restricted
stock units accounted for under SFAS No. 123 and SFAS
No. 123-R are charged to retained earnings. SFAS No. 123-R
requires dividend equivalents paid on restricted stock units
expected to be forfeited to be included in compensation
expense. Prior to the adoption of SFAS No. 123-R, dividend
equivalents paid on restricted stock units that were later
forfeited by employees were reclassified to compensation
expense from retained earnings. The tax benefit related to
dividend equivalents paid on restricted stock units is accounted
for as a reduction of income tax expense (see “ — Recent
Accounting Developments” for a discussion of Emerging Issues
Task Force (EITF) Issue No. 06-11, “Accounting for Income
Tax Benefits of Dividends on Share-Based Payment Awards”).
accounted for as sales are accounted for as collateralized
financings, with the related interest expense recognized in net
revenues over the life of the transaction.
POWER GENERATION. Power generation revenues associated
with the firm’s consolidated power generation facilities are
included in “Trading and principal investments” in the
consolidated statements of earnings when power is delivered.
These revenues were $421 million, $553 million and $496 million
for the years ended November 2007, November 2006 and
November 2005, respectively. Direct employee costs associated
with the firm’s consolidated power generation facilities of
$97 million, $78 million and $70 million for the years ended
November 2007, November 2006 and November 2005,
respectively, are included in “Compensation and benefits.” The
other direct costs associated with these power generation
facilities and related contractual assets are included in “Cost
of power generation.”
COMMISSIONS. Commission revenues from executing and
clearing client transactions on stock, options and futures markets
worldwide are recognized in “Trading and principal investments”
in the consolidated statements of earnings on a trade-date basis.
INSURANCE ACTIVITIES. Revenues from variable annuity
and life insurance contracts, and from providing reinsurance
of such contracts, generally consist of fees assessed on contract
holder account balances for mortality charges, policy
administration and surrender charges. These fees are recognized
within “Trading and principal investments” in the consolidated
statements of earnings in the period that services are provided.
Interest credited to variable annuity and life insurance account
balances and changes in reserves are recognized in “Other
expenses” in the consolidated statements of earnings.
Premiums earned for providing property catastrophe reinsurance
are recognized within “Trading and principal investments” in
the consolidated statements of earnings over the coverage
period, net of premiums ceded for the cost of reinsurance.
Expenses for liabilities related to property catastrophe reinsurance
claims, including estimates of claims that have been incurred
but not reported, are recognized within “Other expenses” in
the consolidated statements of earnings.
MERCHANT BANKING OVERRIDES. The firm is entitled to receive
merchant banking overrides (i.e., an increased share of a fund’s
income and gains) when the return on the funds’ investments
exceeds certain threshold returns. Overrides are based on
investment performance over the life of each merchant banking
fund, and future investment underperformance may require
amounts of override previously distributed to the firm to be
returned to the funds. Accordingly, overrides are recognized in
the consolidated statements of earnings only when all material
contingencies have been resolved. Overrides are included
in “Trading and principal investments” in the consolidated
statements of earnings.
95Goldman Sachs 2007 Annual Report