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Notes to Consolidated Financial Statements
The primary reasons for electing the fair value option are
mitigating volatility in earnings from using different measurement
attributes, simplification and cost-benefit considerations.
SOP NO. 07-1 AND FSP FIN NO. 46-R-7. In June 2007, the
American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 07-1, “Clarification of
the Scope of the Audit and Accounting Guide ‘Audits of
Investment Companies’ and Accounting by Parent Companies
and Equity Method Investors for Investments in Investment
Companies.’’ SOP No. 07-1 clarifies when an entity may apply
the provisions of the Audit and Accounting Guide for
Investment Companies (the Guide). In May 2007, the FASB
issued FSP FIN No. 46-R-7, “Application of FIN 46-R to
Investment Companies,” which amends FIN No. 46-R to make
permanent the temporary deferral of the application of FIN
No. 46-R to entities within the scope of the revised Guide
under SOP No. 07-1. FSP FIN No. 46-R-7 is effective upon
adoption of SOP No. 07-1. In November 2007, the FASB
issued Proposed FSP SOP No. 07-1-a, “The Effective Date
of AICPA Statement of Position 07-1,” which proposes to
indefinitely defer the effective date for SOP No. 07-01 and,
consequently, FSP FIN No. 46-R-7.
EITF ISSUE NO. 06-11.
In June 2007, the EITF reached consensus
on Issue No. 06-11, “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards.” EITF Issue
No. 06-11 requires that the tax benefit related to dividend
equivalents paid on restricted stock units, which are expected
to vest, be recorded as an increase to additional paid-in capital.
The firm currently accounts for this tax benefit as a reduction
to income tax expense. EITF Issue No. 06-11 is to be applied
prospectively for tax benefits on dividends declared in fiscal
years beginning after December 15, 2007, and the firm expects
to adopt the provisions of EITF Issue No. 06-11 beginning in
the first quarter of 2009. The firm is currently evaluating the
impact of adopting EITF Issue No. 06-11 on its financial
condition, results of operations and cash flows.
fair value option is available at specified election dates, such as
when an entity first recognizes a financial asset or financial
liability or upon entering into a firm commitment. Subsequent
changes in fair value must be recorded in earnings. Additionally,
SFAS No. 159 allows for a one-time election for existing positions
upon adoption, with the transition adjustment recorded to
beginning retained earnings.
The firm adopted SFAS No. 159 as of the beginning of 2007
and elected to apply the fair value option to the following
financial assets and liabilities existing at the time of adoption:
■ certain unsecured short-term borrowings, consisting of all
promissory notes and commercial paper;
■ certain other secured financings, primarily transfers accounted
for as financings rather than sales under SFAS No. 140 and
debt raised through the firm’s William Street program;
■
certain unsecured long-term borrowings, including prepaid
physical commodity transactions;
■ resale and repurchase agreements;
■
securities borrowed and loaned within Trading and Principal
Investments, consisting of the firm’s matched book and
certain firm financing activities;
■ securities held by Goldman Sachs Bank USA (GS Bank
USA), which were previously accounted for as available-
for-sale; and
■
receivables from customers and counterparties arising from
transfers accounted for as secured loans rather than purchases
under SFAS No. 140.
The transition adjustment to beginning retained earnings
related to the adoption of SFAS No. 159 was a loss of
$45 million, net of tax, substantially all of which related to
applying the fair value option to prepaid physical commodity
transactions.
Subsequent to the adoption of SFAS No. 159, the firm has
elected to apply the fair value option (i) to new positions within
the above categories, (ii) to corporate loans, corporate loan
commitments and certificates of deposit issued by GS Bank
USA and (iii) generally to investments where the firm would
otherwise apply the equity method of accounting. In certain
cases, the firm may continue to apply the equity method of
accounting to those investments which are strategic in nature
or closely related to the firm’s principal business activities,
where the firm has a significant degree of involvement in the
cash flows or operations of the investee, and/or where cost-
benefit considerations are less significant.
98 Goldman Sachs 2007 Annual Report