Goldman Sachs 2015 Annual Report Download - page 141

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5.
Fair Value Measurements
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. The firm measures certain financial assets
and financial liabilities as a portfolio (i.e., based on its net
exposure to market and/or credit risks).
The best evidence of fair value is a quoted price in an active
market. If quoted prices in active markets are not available,
fair value is determined by reference to prices for similar
instruments, quoted prices or recent transactions in less
active markets, or internally developed models that
primarily use market-based or independently sourced
parameters as inputs including, but not limited to, interest
rates, volatilities, equity or debt prices, foreign exchange
rates, commodity prices, credit spreads and funding spreads
(i.e., the spread, or difference, between the interest rate at
which a borrower could finance a given financial
instrument relative to a benchmark interest rate).
U.S. GAAP has a three-level fair value hierarchy for
disclosure of fair value measurements. The fair value
hierarchy prioritizes inputs to the valuation techniques used
to measure fair value, giving the highest priority to level 1
inputs and the lowest priority to level 3 inputs. A financial
instrument’s level in the fair value hierarchy is based on the
lowest level of input that is significant to its fair value
measurement. The fair value hierarchy is as follows:
Level 1. Inputs are unadjusted quoted prices in active
markets to which the firm had access at the measurement
date for identical, unrestricted assets or liabilities.
Level 2. Inputs to valuation techniques are observable,
either directly or indirectly.
Level 3. One or more inputs to valuation techniques are
significant and unobservable.
The fair values for substantially all of the firm’s financial
assets and financial liabilities are based on observable prices
and inputs and are classified in levels 1 and 2 of the fair
value hierarchy. Certain level 2 and level 3 financial assets
and financial liabilities may require appropriate valuation
adjustments that a market participant would require to
arrive at fair value for factors such as counterparty and the
firm’s credit quality, funding risk, transfer restrictions,
liquidity and bid/offer spreads. Valuation adjustments are
generally based on market evidence.
See Notes 6 through 8 for further information about fair
value measurements of cash instruments, derivatives and
other financial assets and financial liabilities accounted for at
fair value primarily under the fair value option (including
information about unrealized gains and losses related to
level 3 financial assets and financial liabilities, and transfers
in and out of level 3), respectively.
The table below presents financial assets and financial
liabilities accounted for at fair value under the fair value
option or in accordance with other U.S. GAAP.
Counterparty and cash collateral netting represents the
impact on derivatives of netting across levels of the fair value
hierarchy. Netting among positions classified in the same
level is included in that level.
As of December
$ in millions 2015 2014
Total level 1 financial assets $153,051 $139,484
Total level 2 financial assets 432,445 466,030
Total level 3 financial assets 24,046 35,780
Investments in funds measured at NAV 7,757 9,610
Counterparty and cash collateral netting (90,612) (104,616)
Total financial assets at fair value $526,687 $546,288
Total assets 1$861,395 $855,842
Total level 3 financial assets as a percentage
of total assets 2.8% 4.2%
Total level 3 financial assets as a percentage
of total financial assets at fair value 4.6% 6.5%
Total level 1 financial liabilities $ 59,798 $ 59,697
Total level 2 financial liabilities 245,759 253,364
Total level 3 financial liabilities 16,812 15,904
Counterparty and cash collateral netting (41,430) (37,267)
Total financial liabilities at fair value $280,939 $291,698
Total level 3 financial liabilities as a percentage
of total financial liabilities at fair value 6.0% 5.5%
1. Includes $836 billion and $834 billion as of December 2015 and
December 2014, respectively, that is carried at fair value or at amounts that
generally approximate fair value.
The table below presents a summary of level 3 financial
assets. See Notes 6 through 8 for further information about
level 3 financial assets.
Level 3 Financial Assets
as of December
$ in millions 2015 2014
Cash instruments $ 18,131 $ 28,650
Derivatives 5,870 7,074
Other financial assets 45 56
Total $ 24,046 $ 35,780
Level 3 financial assets as of December 2015 decreased
compared with December 2014, primarily reflecting a
decrease in level 3 cash instruments. See Note 6 for further
information about changes in level 3 cash instruments.
Goldman Sachs 2015 Form 10-K 129