Goldman Sachs 2002 Annual Report Download - page 71

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N otes to Consolidated Financial Statem ents
68 G O L D M A N SA CH S 2002 AN N UA L R EPO RT
related interest expense recognized in net revenues over
the life of the transaction.
Principal investments are initially carried at cost as an
approximation of fair value. The carrying value of such
investments is adjusted when changes in the underlying
fair values are readily determinable. For public invest-
ments, values are determined using quoted market prices
discounted for restrictions on sale. For private invest-
ments, adjustments to cost (above or below) are made if
there are third-party transactions evidencing a change in
value. Downward adjustments are also made if manage-
ment determines that the expected realizable value of the
investment is less than the carrying value. In reaching that
determination, management considers many factors
including, but not limited to, the operating cash flows
and financial performance of the companies or properties
relative to budgets or projections, trends within sectors
and/or regions, underlying business models, expected exit
timing and strategy, and any specific rights or terms asso-
ciated with the investment, such as conversion features
and liquidation preferences.
AS SE T M AN AG E M E N T
Asset management fees are generally recognized over the
period the related service is provided based upon average
net asset values. In certain circumstances, the firm is enti-
tled to receive incentive fees when the return on assets
under management exceeds certain benchmark returns or
other performance targets. Incentive fees are generally
based on investment performance over a 12-month period
and are not subject to adjustment once the measurement
period ends. Accordingly, incentive fees are recognized in
the consolidated statements of earnings when the meas-
urement period ends. Asset management fees and incen-
tive fees are included in “Asset management and securities
services” in the consolidated statements of earnings.
C O M M I S S I O N S
The firm generates commissions from executing and
clearing client transactions on stock, options and futures
markets worldwide. These commissions are recorded on
a trade-date basis in “Asset management and securities
services” in the consolidated statements of earnings.
M E RC H A N T B A N K I N G O V E R R I D E
The firm is entitled to receive merchant banking overrides
(i.e., an increased share of a fund’s income and gains)
when the return on the fund’s investments exceeds certain
threshold returns. Overrides are based on investment per-
formance over the life of each merchant banking fund,
and future investment underperformance may require
amounts previously distributed to the firm to be returned
to the funds. Accordingly, overrides are recognized in the
consolidated statements of earnings only when all mate-
rial contingencies have been resolved. Overrides are
included in “Asset management and securities services”
in the consolidated statements of earnings.
Cash and Cash Equivalents
The firm defines cash equivalents as highly liquid
overnight deposits held in the ordinary course of business.
Goodwill and Identifiable Intangible Assets
The cost of acquired companies in excess of the fair value
of net assets at acquisition date is recorded as goodwill.
Prior to December 1, 2001, goodwill was amortized over
periods of 15 to 20 years on a straight-line basis. Effective
December 1, 2001, the firm adopted SFAS No. 142,
“Goodwill and Other Intangible Assets” and, conse-
quently, goodwill is no longer amortized but, instead, is
tested at least annually for impairment. Identifiable intan-
gible assets, which consist primarily of specialist rights
and customer lists, continue to be amortized over their
useful lives.
Property, Leasehold Improvements and Equipment
Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are included in
“Other assets” in the consolidated statements of financial condition. Effective December 1, 2001, the firm changed to
the straight-line method of depreciation for certain property, leasehold improvements and equipment placed in service
after November 2001. This change did not have a material effect on the firm’s results of operations for the year ended
November 2002.
The firm’s depreciation and amortization expense is generally computed using the methods set forth below:
PROPERTY AND CERTAIN INTERNAL USE
EQUIPMENT LEASEHOLD IMPROVEMENTS SOFTWARE COSTS
TERM OF LEASE GREATER TERM OF LEASE LESS
THAN USEFUL LIFE THAN USEFUL LIFE
Placed in service Accelerated cost Accelerated cost Straight-line over the Straight-line over
prior to December 1, 2001 recovery recovery term of the lease useful life of the
asset
Placed in service on Straight-line over Straight-line over Straight-line over the Straight-line over
or after December 1, 2001 useful life of the useful life of the term of the lease useful life of the
asset asset asset