Goldman Sachs 2002 Annual Report Download - page 70

N otes to Consolidated Financial Statem ents
GO L D M A N SA CH S 2002 A N N UAL R EPO RT 67
the outcome of pending litigation and other matters that
affect the consolidated financial statements and related
disclosures. These estimates and assumptions are based
on judgment and available information, and, conse-
quently, actual results could be materially different from
these estimates.
Unless otherwise stated herein, all references to 2002,
2001 and 2000 refer to the firm’s fiscal year ended or the
date, as the context requires, November 29, 2002,
November 30, 2001 and November 24, 2000, respec-
tively. Certain reclassifications have been made to prior-
year amounts to conform to the current-year presentation.
Revenue Recognition
I N V E ST M E N T B AN K I N G
Underwriting revenues and fees from mergers and acqui-
sitions and other corporate finance advisory assignments
are recorded when the services related to the underlying
transaction are completed under the terms of the engage-
ment. Expenses associated with such transactions are
deferred until the related revenue is recognized or the
engagement is otherwise concluded. Underwriting rev-
enues are presented net of related expenses. Expenses
associated with advisory transactions are recorded as non-
compensation expenses, net of client reimbursements.
R E P U R C H A SE AG R E E M E N T S A N D C O L L A T E R A L I Z E D
F I N A N C I N G AR R A N G EM E N T S
Securities purchased under agreements to resell and secu-
rities sold under agreements to repurchase, principally
U.S. government, federal agency and investment-grade
non-U.S. sovereign obligations, represent short-term col-
lateralized financing transactions and are carried in the
consolidated statements of financial condition at their
contractual amounts plus accrued interest. These
amounts are presented on a net-by-counterparty basis
when the requirements of Financial Accounting
Standards Board (FASB) Interpretation No. 41 are satis-
fied. The firm takes possession of securities purchased
under agreements to resell, monitors the market value of
these securities on a daily basis and obtains additional
collateral as appropriate.
Securities borrowed and loaned are recorded based on
the amount of cash collateral advanced or received. These
transactions are generally collateralized by either cash,
securities or letters of credit. The firm takes possession of
securities borrowed, monitors the market value of securi-
ties loaned and obtains additional collateral as appropri-
ate. Income or expense on repurchase agreements and
collateralized financing arrangements is recognized as
interest over the life of the transaction.
F I N A N C I AL I N S T R U M E N TS
Gains and losses on financial instruments are recorded on
a trade-date basis in the consolidated statements of earn-
ings. The consolidated statements of financial condition
generally reflect purchases and sales of financial instru-
ments on a trade-date basis.
“Financial instruments owned, at fair value” and
“Financial instruments sold, but not yet purchased, at
fair value” in the consolidated statements of financial
condition are carried at fair value or amounts that
approximate fair value, with related unrealized gains or
losses recognized in the firm’s results of operations. The
fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current
transaction between willing parties, other than in a
forced or liquidation sale.
Quoted market prices in active markets are the best evi-
dence of fair value and the firm uses them when available.
If quoted market prices in active markets are not avail-
able, management’s estimate of fair value is based on, if
available, quoted prices or recent transactions in less
active markets and/or prices of similar instruments.
If prices are not readily available either through quoted
market prices in active markets or alternative pricing
sources, or if liquidating a position is reasonably
expected to affect market prices, fair value is based on
valuation models or management’s estimate, using the
best information available, of amounts that could be real-
ized under current market conditions, assuming an
orderly liquidation over a reasonable period of time. The
firm’s valuation models consider, among other inputs,
contractual and market prices, yield curves, credit,
volatility factors, prepayment rates and/or correlations of
the underlying positions.
The inputs used in the firm’s valuation models are based
on quoted market prices in active markets, if available,
or, if not, from quoted market prices or recent transac-
tions in less active markets, and prices of similar instru-
ments. Where such data is not readily available, inputs
are derived from other market data taking into account
observable market movements that could reasonably be
expected to affect the derived input. Different valuation
models and assumptions could produce materially differ-
ent estimates of fair value.
In general, transfers of financial assets are accounted for
as sales under SFAS No. 140 when the firm has relin-
quished control over the transferred assets. For transfers
accounted for as sales, any related gains or losses are rec-
ognized in net revenues. Transfers that are not accounted
for as sales are accounted for as repurchase agreements
and collateralized financing arrangements, with the