Goldman Sachs 2004 Annual Report Download - page 105

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GOLDMAN฀SAC H S ฀ 2 0 0 4 ฀ANNUAL฀ R E P O RT฀฀฀103
notes฀to฀consolidated฀financial฀statements
GOLDMAN฀SAC H S ฀ 2 0 0 4 ฀ANNUAL฀ R E P O RT฀฀฀103
GSI, a registered U.K. broker-dealer, is subject to the capital
requirements of the Financial Services Authority, and GSJL, a
Tokyo-based broker-dealer, is subject to the capital require-
ments of the Financial Services Agency. As of November 2004
and November 2003, GSI and GSJL were in compliance with
their local capital adequacy requirements.
Certain other subsidiaries of the firm are also subject to capital
adequacy requirements promulgated by authorities of the coun-
tries in which they operate. As of November 2004 and
November 2003, these subsidiaries were in compliance with
their local capital adequacy requirements.
The SEC has adopted rule amendments that establish alterna-
tive net capital requirements for broker-dealers that are part of
a consolidated supervised entity. As a condition to its use of
the alternative method, a broker-dealer’s ultimate holding
company and affiliates (referred to collectively as a consoli-
dated supervised entity or CSE) must consent to group-wide
supervision and examination by the SEC. GS&Co. anticipates
applying for permission to use this alternative method. The
firm expects that doing so will enable it to comply with the
requirements of the Financial Groups Directive (Directive
2002/87/EC of the European Parliament and of the Council,
relating to the regulation in Europe of financial services organ-
izations). On becoming subject to the SEC’s group-wide
supervision, the firm will be required to report to the SEC
computations of the firm’s capital adequacy.
NOTE฀15
Business Segments
In reporting to management, the firm’s operating results are
categorized into the following three segments: Investment
Banking, Trading and Principal Investments, and Asset
Management and Securities Services.
The firm made certain changes to its segment reporting struc-
ture in 2003. These changes included reclassifying the following
from Asset Management and Securities Services to Trading and
Principal Investments:
• equity commissions and clearing and execution fees;
• merchant banking overrides; and
• the matched book businesses.
These reclassifications did not affect the firm’s historical con-
solidated results of operations, financial condition or cash
flows. Certain reclassifications have been made to previously
reported amounts to conform to the current presentation.
BASIS฀OF฀ PRESENTATION
In reporting segments, certain of the firm’s business lines have
been aggregated where they have similar economic characteris-
tics and are similar in each of the following 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 envi-
ronments in which they operate.
The cost drivers of the firm taken as a whole – compensation,
headcount and levels of business activity – are broadly similar
in each of the firm’s business segments. Compensation expenses
within the firm’s segments reflect, among other factors, the over-
all performance of the firm as well as performance of individual
business units. Consequently, pre-tax margins in one segment of
the firm’s business may be significantly affected by the perfor-
mance of the firm’s other business segments.
The firm allocates revenues and expenses among the three seg-
ments. Due to the integrated nature of the business segments,
estimates and judgments have been made in allocating certain
revenue and expense items. Transactions between segments are
based on specific criteria or approximate third-party rates. Total
operating expenses include corporate items that have not been
allocated to individual business segments. The allocation proc-
ess is based on the manner in which management views the
business of the firm.
The segment information presented in the table below is pre-
pared according to the following methodologies:
• Revenues and expenses directly associated with each seg-
ment are included in determining pre-tax earnings.
• Net revenues in the firm’s segments include allocations of
interest income and interest expense to specific securities,
commodities and other positions in relation to the cash
generated by, or funding requirements of, such underlying
positions. Net interest is included within segment net rev-
enues as it is consistent with the way in which management
assesses segment performance.
• Overhead expenses not directly allocable to specific seg-
ments are allocated ratably based on direct segment
expenses.
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