Goldman Sachs 2004 Annual Report Download - page 80

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notes฀to฀consolidated฀financial฀statements
78฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
78฀฀฀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
in public companies (excluding the firm’s investment in
the convertible preferred stock of Sumitomo Mitsui
Financial Group, Inc. (SMFG)) and the firm’s investment
in SMFG.
The firm’s private principal investments, by their nature,
have little or no price transparency. Such investments are
initially carried at cost as an approximation of fair value.
Adjustments to carrying value are made if there are third-
party transactions evidencing a change in value. Downward
adjustments are also made, in the absence of third-party
transactions, if it is determined that the expected realizable
value of the investment is less than the carrying value. In
reaching that determination, many factors are considered,
including, but not limited to, the operating cash flows and
financial performance of the companies or properties rela-
tive to budgets or projections, trends within sectors and/or
regions, underlying business models, expected exit timing
and strategy, and any specific rights or terms associated
with the investment, such as conversion features and
liquidation preferences.
The firm’s public principal investments, which tend to be
large, concentrated holdings that result from initial public
offerings or other corporate transactions, are valued using
quoted market prices discounted for restrictions on sale. If
liquidating a position is reasonably expected to affect mar-
ket prices, valuations are adjusted accordingly based on
predetermined written policies.
The firm’s investment in the convertible preferred stock of
SMFG is carried at fair value, which is derived from a model
that incorporates SMFG’s common stock price and credit
spreads, the impact of nontransferability and illiquidity and
downside protection on the conversion strike price. The firm
has the right to convert its preferred stock investment in
SMFG into shares of SMFG common stock beginning on
February 8, 2005. The current conversion price is ¥322,300,
but this price is subject to downward adjustment if the price
of SMFG common stock at the time of conversion is less than
the conversion price (subject to a floor of ¥106,300). The
firm’s convertible preferred investment is generally nontrans-
ferable. One-third of the underlying shares of SMFG com-
mon stock will become transferable on February 8, 2005,
with the remaining shares of common stock becoming trans-
ferable in equal installments on February 7, 2006 and
February 7, 2007. In addition, restrictions on the firm’s abil-
ity to hedge the underlying common stock will lapse in three
equal annual installments beginning on February 7, 2005.
In general, transfers of financial assets are accounted for as
sales under SFAS No. 140 when the firm has relinquished
control over the transferred assets. For transfers accounted for
as sales, any related gains or losses are recognized in net rev-
enues. Transfers that are not accounted for as sales are
accounted for as collateralized financing arrangements, with
the related interest expense recognized in net revenues over
the lives of the transactions.
Commissions
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 “Trading and principal investments” in the consoli-
dated statements of earnings.
Power฀Generation
Power generation revenues associated with the firm’s consoli-
dated power plant operations are included in “Trading and
principal investments” in the consolidated statements of earn-
ings when power is delivered. “Cost of power generation” in
the consolidated statement of earnings includes all of the direct
costs of these plant operations (e.g., fuel, operations and main-
tenance), as well as the depreciation and amortization associated
with the plant and related contractual assets.
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀15฀•฀Proof฀10฀•฀2/4/05฀•฀0700
The following table sets forth the power generation revenues and costs directly associated with the firm’s consolidated power plant
operations:
฀ ฀ ฀YEAR฀ENDED฀NOVEMBER
(IN฀MILLIONS)฀ 2004฀ 2003(2)฀ 2002(2)฀
Revenues(1) $488 $15฀ $฀—
Cost of power generation 401 11฀ ฀—
(1)฀฀Excludes฀ revenues฀ from฀ nonconsolidated฀ power฀ plant฀ operations,฀ accounted฀ for฀ in฀ accordance฀ with฀ the฀ equity฀ method฀ of฀ accounting,฀ as฀ well฀ as฀ revenues฀
associated฀with฀the฀firm’s฀power฀trading฀activities.
(2)฀The฀firm’s฀consolidated฀power฀plant฀operations฀commenced฀in฀October฀2003.