Goldman Sachs 2004 Annual Report Download - page 78

notes฀to฀consolidated฀financial฀statements
76฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
76฀฀฀G O L D M A N ฀ S A C H S ฀ 2 004฀ A N N U A L ฀ R E P O RT
Statement of Financial Accounting Standards (SFAS)
No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” and
FIN No. 46-R, the firm does not consolidate QSPEs.
• e q u i ty-metho d ฀inv e s t ments – When the firm does not
have a controlling financial interest in an entity but exerts
significant influence over the entity’s operating and finan-
cial policies (generally defined as owning a voting interest
of 20% to 50%) and has an investment in common stock
or in-substance common stock, the firm accounts for its
investment in accordance with the equity method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 18, “The Equity Method of Accounting
for Investments in Common Stock.”
• o t h e r – If the firm does not consolidate an entity or apply
the equity method of accounting, the firm accounts for its
investment at fair value.
The firm also has formed numerous nonconsolidated merchant
banking funds with third-party investors that are typically organized
as limited partnerships. The firm acts as general partner for these
funds and does not hold a majority of the economic interests in
any fund. Where the firm holds more than a minor interest in a
fund, it is subject to removal as general partner. Such fund invest-
ments are included in “Financial instruments owned, at fair
value” in the consolidated statements of financial condition.
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that
require management to make certain estimates and assump-
tions regarding fair value measurements, the accounting for
goodwill and identifiable intangible assets, the provision for
potential losses that may arise from litigation and regulatory
proceedings, tax audits and other matters that affect the con-
solidated financial statements and related disclosures. These
estimates and assumptions are based on the best available infor-
mation; nonetheless, actual results could be materially different
from these estimates.
Unless otherwise stated herein, all references to November 2004,
November 2003 and November 2002 refer to the firm’s fiscal
years ended, or the dates, as the context requires, November
26, 2004, November 28, 2003 and November 29, 2002, respec-
tively. Certain reclassifications have been made to previously
reported amounts to conform to the current presentation.
REVENUE฀RECOGNITION
Investment฀Banking
Underwriting revenues and fees from mergers and acquisitions
and other corporate finance advisory assignments are recorded
when the services related to the underlying transaction are
completed under the terms of the engagement. Expenses associ-
ated with such transactions are deferred until the related revenue
is recognized or the engagement is otherwise concluded.
Underwriting revenues are presented net of related expenses.
Expenses associated with advisory transactions are recorded as
non-compensation expenses, net of client reimbursements.
Repurchase฀Agreements฀and฀฀
Collateralized฀Financing฀Arrangements
Securities purchased under agreements to resell and securities
sold under agreements to repurchase, principally U.S. govern-
ment, federal agency and investment-grade foreign sovereign
obligations, represent short-term collateralized financing trans-
actions and are carried in the consolidated statements of finan-
cial condition at their contractual amounts plus accrued
interest. These amounts are presented on a net-by-counterparty
basis when the requirements of FIN No. 41, “Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements,” or FIN No. 39, “Offsetting of Amounts Related
to Certain Contracts,” are satisfied. The firm takes possession
of securities purchased under agreements to resell, makes deliv-
ery of securities sold under agreements to repurchase, monitors
the market value of these securities on a daily basis and delivers
or obtains additional collateral as appropriate.
Securities borrowed and loaned are recorded based on the
amount of cash collateral advanced or received. These transac-
tions are generally collateralized by cash, securities or letters of
credit. The firm takes possession of securities borrowed, makes
delivery of securities loaned, monitors the market value of secu-
rities borrowed and loaned, and delivers or obtains additional
collateral as appropriate. Interest income or expense on repur-
chase agreements and collateralized financing arrangements is
recognized in net revenues over the life of the transaction.
Financial฀Instruments
The consolidated statements of financial condition reflect pur-
chases and sales of financial instruments on a trade-date basis.
“Total financial instruments owned, at fair value” and “Financial
instruments sold, but not yet purchased, at fair value” in the
consolidated statements of financial condition consist of finan-
cial instruments carried at fair value or amounts that approxi-
mate 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.
In determining fair value, the firm separates financial instru-
ments into three categories – cash (i.e., nonderivative) trading
instruments, derivative contracts and principal investments.
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