Goldman Sachs 2007 Annual Report Download - page 94

Notes to Consolidated Financial Statements
and tax audits. Although these and other estimates and
assumptions are based on the best available information,
actual results could be materially different from these estimates.
Revenue Recognition
INVESTMENT BANKING. Underwriting revenues and fees
from mergers and acquisitions and other financial advisory
assignments are recognized in the consolidated statements of
earnings when the services related to the underlying transaction
are completed under the terms of the engagement. Expenses
associated 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 financial advisory transactions
are recorded as non-compensation expenses, net of client
reimbursements.
FINANCIAL INSTRUMENTS. “Total financial instruments owned,
at fair value” and “Financial instruments sold, but not yet
purchased, at fair value” are reflected in the consolidated
statements of financial condition on a trade-date basis. Related
unrealized gains or losses are generally recognized in “Trading
and principal investments” in the consolidated statements of
earnings. The fair value of a financial instrument is the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (the exit price). Instruments that the
firm owns (long positions) are marked to bid prices, and
instruments that the firm has sold, but not yet purchased (short
positions), are marked to offer prices. Fair value measurements
are not adjusted for transaction costs.
The firm adopted SFAS No. 157, “Fair Value Measurements,”
as of the beginning of 2007. SFAS No. 157 establishes a fair
value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy under SFAS No. 157
are described below:
Basis of Fair Value Measurement
LEVEL 1 Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical,
unrestricted assets or liabilities;
LEVEL 2 Quoted prices in markets that are not active or financial
instruments for which all significant inputs are
observable, either directly or indirectly;
LEVEL 3 Prices or valuations that require inputs that are both
significant to the fair value measurement and
unobservable.
types of assets a QSPE may hold, limits on asset sales, the use
of derivatives and financial guarantees, and the level of
discretion a servicer may exercise in attempting to collect
receivables. These criteria may require management to make
judgments about complex matters, including whether a
derivative is considered passive and the degree of discretion
a servicer may exercise. In accordance with SFAS No. 140
and FIN No. 46-R, the firm does not consolidate QSPEs.
■ EQUITY-METHOD INVESTMENTS. When the firm does not
have a controlling financial interest in an entity but exerts
significant influence over the entity’s operating and financial
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.” For investments acquired
subsequent to the adoption of SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities,”
the firm generally has elected to apply the fair value option
in accounting for such investments. See “— Recent Accounting
Developments” for a discussion of the firm’s adoption of
SFAS No. 159.
■
OTHER. 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 investment funds with third-party investors
that are typically organized as limited partnerships. The firm
acts as general partner for these funds and generally does not
hold a majority of the economic interests in these funds. The
firm has generally provided the third-party investors with
rights to terminate the funds or to remove the firm as the
general partner. These fund investments are included in
“Financial instruments owned, at fair value” in the consolidated
statements of financial condition.
Unless otherwise stated herein, all references to November 2007,
November 2006 and November 2005 refer to the firm’s
fiscal years ended, or the dates, as the context requires,
November 30, 2007, November 24, 2006 and November 25, 2005,
respectively. Certain reclassifications have been made to previously
reported amounts to conform to the current presentation.
Use of Estimates
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that
require management to make certain estimates and assumptions.
The most important of these estimates and assumptions relate
to fair value measurements, the accounting for goodwill and
identifiable intangible assets and the provision for potential
losses that may arise from litigation and regulatory proceedings
92 Goldman Sachs 2007 Annual Report