Goldman Sachs 2007 Annual Report Download - page 99

Notes to Consolidated Financial Statements
No. 157 requires that a fair value measurement reflect the
assumptions market participants would use in pricing an asset
or liability based on the best information available. Assumptions
include the risks inherent in a particular valuation technique
(such as a pricing model) and/or the risks inherent in the inputs
to the model.
In addition, SFAS No. 157 prohibits the recognition of “block
discounts” for large holdings of unrestricted financial instruments
where quoted prices are readily and regularly available for an
identical asset or liability in an active market.
The provisions of SFAS No. 157 are to be applied prospectively,
except changes in fair value measurements that result from the
initial application of SFAS No. 157 to existing derivative financial
instruments measured under EITF Issue No. 02-3, existing
hybrid financial instruments measured at fair value and block
discounts, all of which are to be recorded as an adjustment to
beginning retained earnings in the year of adoption.
The firm adopted SFAS No. 157 as of the beginning of 2007.
The transition adjustment to beginning retained earnings was
a gain of $51 million, net of tax. For the first quarter of 2007,
the effect of the nullification of EITF Issue No. 02-3 and the
removal of liquidity discounts for actively traded positions was
not material. In addition, under SFAS No. 157, gains on principal
investments are recorded in the absence of substantial third-
party transactions if market evidence is sufficient. In the first
quarter of 2007, the firm recorded approximately $500 million
of such gains as a result of adopting SFAS No. 157.
SFAS NO. 158. In September 2006, the FASB issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132-R.” SFAS No. 158 requires
an entity to recognize in its statement of financial condition the
funded status of its defined benefit pension and postretirement
plans, measured as the difference between the fair value of the
plan assets and the benefit obligation. SFAS No. 158 also
requires an entity to recognize changes in the funded status of
a defined benefit pension and postretirement plan within
accumulated other comprehensive income, net of tax, to the
extent such changes are not recognized in earnings as components
of periodic net benefit cost. SFAS No. 158 is effective as of the
end of the fiscal year ending after December 15, 2006. The firm
adopted SFAS No. 158 as of the end of 2007. The adjustment
to accumulated other comprehensive loss for the initial
application of SFAS No. 158 was $194 million, net of tax.
SFAS NO. 159. In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which gives entities the option to measure
eligible financial assets, financial liabilities and firm commitments
at fair value (i.e., the fair value option), on an instrument-by-
instrument basis, that are otherwise not accounted for at fair
value under other accounting standards. The election to use the
SFAS No. 5, “Accounting for Contingencies,” as amended,
have been met (see “
— Recent Accounting Developments”
below for a discussion of the impact of FIN No. 48,
“Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement No. 109,” on SFAS No. 109).
Earnings Per Common Share (EPS)
Basic EPS is calculated by dividing net earnings applicable to
common shareholders by the weighted average number of
common shares outstanding. Common shares outstanding
includes common stock and restricted stock units for which no
future service is required as a condition to the delivery of the
underlying common stock. Diluted EPS includes the determinants
of basic EPS and, in addition, reflects the dilutive effect of the
common stock deliverable pursuant to stock options and to
restricted stock units for which future service is required as a
condition to the delivery of the underlying common stock.
Cash and Cash Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business.
Recent Accounting Developments
FIN NO. 48. In June 2006, the FASB issued FIN No. 48,
“Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement No. 109.” FIN No. 48 requires that the
firm determine whether a tax position is more likely than not
to be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical
merits of the position. Once it is determined that a position
meets this recognition threshold, the position is measured to
determine the amount of benefit to be recognized in the financial
statements. The firm will adopt the provisions of FIN No. 48
in the first quarter of 2008. Adoption of FIN No. 48 will not
have a material effect on the firm’s financial condition, results
of operations or cash flows.
SFAS NO. 157. In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements.” SFAS No. 157 clarifies
that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. Under
SFAS No. 157, fair value measurements are not adjusted for
transaction costs.
SFAS No. 157 nullifies the guidance included in EITF Issue
No. 02-3, “Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved
in Energy Trading and Risk Management Activities,” that
prohibited the recognition of a day one gain or loss on derivative
contracts (and hybrid financial instruments measured at fair
value under SFAS No. 155) where the firm was unable to verify
all of the significant model inputs to observable market data
and/or verify the model to market transactions. However, SFAS
97Goldman Sachs 2007 Annual Report