Goldman Sachs 2002 Annual Report Download - page 72

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N otes to Consolidated Financial Statem ents
GO L D M A N SA CH S 2002 A N N UAL R EPO RT 69
Earnings Per Share
Basic earnings per share (EPS) is calculated by dividing
net earnings by the weighted average number of common
shares outstanding. Common shares outstanding includes
common stock and nonvoting common stock as well as
restricted stock units for which no future service is
required as a condition to the delivery of the underlying
common stock. Diluted EPS includes the determinants of
basic EPS and, in addition, reflects the dilutive effect of
the common stock deliverable pursuant to stock options
and to restricted stock units for which future service is
required as a condition to the delivery of the underlying
common stock.
Stock-Based Compensation
The firm has historically accounted for stock-based
employee compensation plans in accordance with APB
No. 25, “Accounting for Stock Issued to Employees,” as
permitted by SFAS No. 123, “Accounting for Stock-
Based Compensation.” In accordance with APB No. 25,
compensation expense is not recognized for stock options
that have no intrinsic value on the date of grant.
Compensation expense is recognized immediately for
restricted stock units for which future service is not
required as a condition to the delivery of the underlying
shares of common stock. For restricted stock units with
future service requirements, compensation expense is rec-
ognized over the relevant service period using amortiza-
tion methodologies determined by the applicable vesting
provisions.
Effective in fiscal 2003, the firm will begin to account for
stock-based employee compensation in accordance with
the fair-value method prescribed by SFAS No. 123, as
amended by SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure,” using the
prospective adoption method. Under this method of
adoption, compensation expense will be recognized
based on the fair value of stock options and restricted
stock units granted for fiscal 2003 and future years over
the related service period. The amount of stock-based
compensation to be recognized under SFAS No. 123 in
fiscal 2003 and beyond is not currently determinable
because the number and value of stock options and/or
restricted stock units to be granted to employees in the
future is not yet known, nor are the related future service
provisions. The firm elected to adopt the disclosure pro-
visions of SFAS No. 148 for the fiscal year ended 2002.
Stock options granted for the years ended November 2002, November 2001 and November 2000 were accounted for,
and will continue to be accounted for, under the intrinsic value-based method as prescribed by APB No. 25. Therefore,
no compensation expense was recognized for those stock options that had no intrinsic value on the date of grant. If the
firm were to recognize compensation expense over the relevant service period, under the fair value method of SFAS
No. 123 with respect to these stock options, net earnings would have decreased, resulting in pro forma net earnings and
EPS as presented below:
YEAR ENDED NOVEMBER
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
Net earnings, as reported $2,114 $2,310 $3,067
Add: Stock-based employee compensation expense, net of related tax
benefits, included in reported net earnings 416 499 822
Deduct: Stock-based employee compensation, net of related tax
effects, determined under fair-value based method for all awards (785) (844) (918)
Pro forma net earnings $1,745 $1,965 $2,971
EPS, as reported
Basic $ 4.27 $ 4.53 $ 6.33
Diluted 4.03 4.26 6.00
Pro forma EPS
Basic $ 3.52 $ 3.86 $ 6.13
Diluted 3.32 3.63 5.81