Goldman Sachs 2002 Annual Report Download - page 89

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options exchanges. Trading and Principal Investments is
divided into three categories:
•f icc – The firm makes markets in and trades inter-
est rate and credit products, currencies and com-
modities, structures and enters into a wide variety
of derivative transactions, and engages in propri-
etary trading;
•eq uit ies – The firm makes markets in, acts as a
specialist for, and trades equities and equity-related
products, structures and enters into equity deriva-
tive transactions, and engages in proprietary trad-
ing; and
•pr incipal invest ment s – Principal Investments
primarily represents net revenues from the firm’s
merchant banking investments.
Asset Management and Securities Services
The Asset Management and Securities Services segment
includes services related to the following:
•asset management – Asset Management gener-
ates management fees by providing investment
advisory services to a diverse client base of institu-
tions and individuals;
•secur it ies ser vices – Securities Services includes
prime brokerage, financing services and securities
lending, and the firm’s matched book businesses, all
of which generate revenues primarily in the form of
interest rate spreads or fees; and
•co mmissio ns – Commissions includes fees from
executing and clearing client transactions on major
stock, options and futures markets worldwide.
Commissions also includes revenues from the
increased share of the income and gains derived
from the firm’s merchant banking funds when the
return on a fund’s investments exceeds certain
threshold returns.
Basis of Presentation
In reporting segments, certain of the firm’s business
lines have been aggregated where they have similar eco-
nomic characteristics and are similar in each of the fol-
lowing areas: (i) the nature of the services they provide,
(ii) their methods of distribution, (iii) the types of clients
they serve and (iv) the regulatory environments in which
they operate.
The cost structures of each of the firm’s segments are
broadly similar to that of the firm taken as a whole in
that they are primarily influenced by discretionary com-
pensation, headcount and levels of business activity. The
firm’s overall compensation and benefits expenses are
generally targeted at 50% (plus or minus a few percent-
age points) of consolidated net revenues. A substantial
portion of the firm’s compensation expense represents
discretionary bonuses. Compensation expense within a
segment reflects, among other factors, the overall per-
formance of the firm as well as the performance of the
individual business unit.
The firm allocates revenues and expenses among the
three segments. Due to the integrated nature of the busi-
ness segments, estimates and judgments have been made
in allocating certain revenue and expense items.
Transactions between segments are based on specific cri-
teria or approximate third-party rates. Total operating
expenses include corporate items that have not been allo-
cated to individual business segments. The allocation
process is based on the manner in which management
views the business of the firm.
The segment information presented in the table below is
prepared according to the following methodologies:
•Revenues and expenses directly associated
with each segment are included in determining
pre-tax earnings.
•Net revenues in the firm’s segments include alloca-
tions of interest income and interest expense to spe-
cific securities, commodities and other positions in
relation to the cash generated by, or funding
requirements of, the underlying positions. Net
interest is included within segment net revenues as
it is consistent with the way in which management
assesses segment performance.
•Overhead expenses not directly allocable to specific
segments are allocated ratably based on direct seg-
ment expenses.
•The nonrecurring expenses associated with the
firm’s acquisition awards and conversion to corpo-
rate form and related transactions are not allocated
to individual segments as management excludes
them in evaluating segment performance.
N otes to Consolidated Financial Statem ents
86 G O L D M A N SA CH S 2002 AN N UA L R EPO RT