Goldman Sachs 2015 Annual Report Download - page 135

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investment Funds. The firm has formed numerous
investment funds with third-party investors. These funds
are typically organized as limited partnerships or limited
liability companies for which the firm acts as general
partner or manager. Generally, the firm does not hold a
majority of the economic interests in these funds. These
funds are usually voting interest entities and generally are
not consolidated because third-party investors typically
have rights to terminate the funds or to remove the firm as
general partner or manager. Investments in these funds are
included in “Financial instruments owned, at fair value.”
See Notes 6, 18 and 22 for further information about
investments in funds.
Use of Estimates
Preparation of these consolidated financial statements
requires management to make certain estimates and
assumptions, the most important of which relate to fair
value measurements, accounting for goodwill and
identifiable intangible assets, the provisions for losses that
may arise from litigation, regulatory proceedings and tax
audits, and the allowance for losses on loans and lending
commitments held for investment. These estimates and
assumptions are based on the best available information
but actual results could be materially different.
Revenue Recognition
Financial Assets and Financial Liabilities at Fair Value.
Financial instruments owned, at fair value and Financial
instruments sold, but not yet purchased, at fair value are
recorded at fair value either under the fair value option or in
accordance with other U.S. GAAP. In addition, the firm has
elected to account for certain of its other financial assets
and financial liabilities at fair value by electing the fair value
option. The fair value of a financial instrument is the
amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. Financial assets are
marked to bid prices and financial liabilities are marked to
offer prices. Fair value measurements do not include
transaction costs. Fair value gains or losses are generally
included in “Market making” for positions in Institutional
Client Services and “Other principal transactions” for
positions in Investing & Lending. See Notes 5 through 8 for
further information about fair value measurements.
Investment Banking. Fees from financial advisory
assignments and underwriting revenues are recognized in
earnings when the services related to the underlying
transaction are completed under the terms of the
assignment. Expenses associated with such transactions are
deferred until the related revenue is recognized or the
assignment is otherwise concluded. Expenses associated
with financial advisory assignments are recorded as non-
compensation expenses, net of client reimbursements.
Underwriting revenues are presented net of related
expenses.
Investment Management. The firm earns management
fees and incentive fees for investment management services.
Management fees for mutual funds are calculated as a
percentage of daily net asset value and are received
monthly. Management fees for hedge funds and separately
managed accounts are calculated as a percentage of month-
end net asset value and are generally received quarterly.
Management fees for private equity funds are calculated as
a percentage of monthly invested capital or commitments
and are received quarterly, semi-annually or annually,
depending on the fund. All management fees are recognized
over the period that the related service is provided.
Incentive fees are calculated as a percentage of a fund’s or
separately managed account’s return, or excess return
above a specified benchmark or other performance target.
Incentive fees are generally based on investment
performance over a 12-month period or over the life of a
fund. Fees that are based on performance over a 12-month
period are subject to adjustment prior to the end of the
measurement period. For fees that are based on investment
performance over the life of the fund, future investment
underperformance may require fees previously distributed
to the firm to be returned to the fund. Incentive fees are
recognized only when all material contingencies have been
resolved. Management and incentive fee revenues are
included in “Investment management” revenues.
The firm makes payments to brokers and advisors related
to the placement of the firm’s investment funds. These
payments are computed based on either a percentage of the
management fee or the investment fund’s net asset value.
Where the firm is principal to the arrangement, such costs
are recorded on a gross basis and included in “Brokerage,
clearing, exchange and distribution fees,” and where the
firm is agent to the arrangement, such costs are recorded on
a net basis in “Investment management” revenues.
Goldman Sachs 2015 Form 10-K 123