Goldman Sachs 2015 Annual Report Download - page 162

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8.
Fair Value Option
Other Financial Assets and Financial Liabilities at
Fair Value
In addition to all cash and derivative instruments included
in “Financial instruments owned, at fair value” and
“Financial instruments sold, but not yet purchased, at fair
value,” the firm accounts for certain of its other financial
assets and financial liabilities at fair value primarily under
the fair value option. The primary reasons for electing the
fair value option are to:
‰Reflect economic events in earnings on a timely basis;
‰Mitigate volatility in earnings from using different
measurement attributes (e.g., transfers of financial
instruments owned accounted for as financings are
recorded at fair value whereas the related secured
financing would be recorded on an accrual basis absent
electing the fair value option); and
‰Address simplification and cost-benefit considerations
(e.g., accounting for hybrid financial instruments at fair
value in their entirety versus bifurcation of embedded
derivatives and hedge accounting for debt hosts).
Hybrid financial instruments are instruments that contain
bifurcatable embedded derivatives 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 from the associated debt, the
derivative 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 hedges. If the firm does
not elect to bifurcate, the entire hybrid financial instrument
is accounted for at fair value under the fair value option.
Other financial assets and financial liabilities accounted for
at fair value under the fair value option include:
‰Repurchase agreements and substantially all resale
agreements;
‰Securities borrowed and loaned within Fixed Income,
Currency and Commodities Client Execution;
‰Substantially all other secured financings, including
transfers of assets accounted for as financings rather than
sales;
‰Certain unsecured short-term borrowings, consisting of
all promissory notes and commercial paper, and certain
hybrid financial instruments;
‰Certain unsecured long-term borrowings, including
certain prepaid commodity transactions and certain
hybrid financial instruments;
‰Certain receivables from customers and counterparties,
including transfers of assets accounted for as secured
loans rather than purchases and certain margin loans;
‰Certain time deposits issued by the firm’s bank
subsidiaries (deposits with no stated maturity are not
eligible for a fair value option election), including
structured certificates of deposit, which are hybrid
financial instruments; and
‰Certain subordinated liabilities issued by consolidated
VIEs.
These financial assets and financial liabilities at fair value
are generally valued based on discounted cash flow
techniques, which incorporate inputs with reasonable levels
of price transparency, and are generally classified as level 2
because the inputs are observable. Valuation adjustments
may be made for liquidity and for counterparty and the
firm’s credit quality.
See below for information about the significant inputs used
to value other financial assets and financial liabilities at fair
value, including the ranges of significant unobservable
inputs used to value the level 3 instruments within these
categories. These ranges represent the significant
unobservable inputs that were used in the valuation of each
type of other financial assets and financial liabilities at fair
value. The ranges and weighted averages of these inputs are
not representative of the appropriate inputs to use when
calculating the fair value of any one instrument. For
example, the highest yield presented below for other
secured financings is appropriate for valuing a specific
agreement in that category but may not be appropriate for
valuing any other agreements in that category. Accordingly,
the ranges of inputs presented below do not represent
uncertainty in, or possible ranges of, fair value
measurements of the firm’s level 3 other financial assets and
financial liabilities.
150 Goldman Sachs 2015 Form 10-K