Goldman Sachs 2007 Annual Report Download - page 136

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Notes to Consolidated Financial Statements
The firm allocates revenues and expenses among the three
business segments. Due to the integrated nature of these
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 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 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 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 segment expenses.
NOTE 16
Business Segments
In reporting to management, the firm’s operating results are
categorized into the following three business segments:
Investment Banking, Trading and Principal Investments, and
Asset Management and Securities Services.
Basis of Presentation
In reporting segments, certain of the firm’s business lines have
been aggregated where they have similar economic characteristics
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 environments
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 and
benefits expenses within the firm’s segments reflect, among
other factors, the overall performance of the firm as well as the
performance of individual business units. Consequently,
pre-tax margins in one segment of the firm’s business may be
significantly affected by the performance of the firm’s other
business segments.
134 Goldman Sachs 2007 Annual Report