Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 7, 2014)
  • 10-Q (May 9, 2014)
  • 10-Q (Nov 7, 2013)
  • 10-Q (Aug 8, 2013)
  • 10-Q (May 9, 2013)
  • 10-Q (Nov 8, 2012)

 
8-K

 
Other

Goldman Sachs Group 10-Q 2009
FORM 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
     
    For the quarterly period ended March 27, 2009
 
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
     
    For the transition period from                        to
 
Commission File Number: 001-14965
 
The Goldman Sachs Group, Inc.
 
     
Delaware   13-4019460
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
85 Broad Street, New York, NY   10004
(Address of principal executive offices)   (Zip Code)
 
(212) 902-1000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes  o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o  Yes  o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x     Accelerated filer o
 
Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o  Yes  x  No
 
 
As of April 24, 2009, there were 503,420,969 shares of the registrant’s common stock outstanding.
 


 

 
 
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 27, 2009
 
INDEX
 
             
        Page
Form 10-Q Item Number:
 
No.
 
           
         
           
         
        2  
        3  
        4  
        5  
        6  
        7  
        77  
        78  
           
      81  
           
      143  
           
      143  
           
         
           
      144  
           
      146  
           
      147  
       
    148  
 EX-12.1: STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 EX-15.1: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
 EX-31.1: RULE 13A-14(A) CERTIFICATIONS
 EX-32.1: SECTION 1350 CERTIFICATIONS


1


Table of Contents

 
 
Item 1:   Financial Statements (Unaudited)
 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                         
    Three Months
  Three Months
  One Month
    Ended March   Ended February   Ended December
    2009   2008   2008
    (in millions, except per share amounts)
 
Revenues
                       
Investment banking
  $ 823     $ 1,166     $ 135  
Trading and principal investments
    5,706       4,877       (964 )
Asset management and securities services
    989       1,341       327  
                         
Total non-interest revenues
    7,518       7,384       (502 )
                         
Interest income
    4,362       11,245       1,687  
Interest expense
    2,455       10,294       1,002  
                         
Net interest income
    1,907       951       685  
                         
Net revenues, including net interest income
    9,425       8,335       183  
                         
Operating expenses
                       
Compensation and benefits
    4,712       4,001       744  
                         
Brokerage, clearing, exchange and distribution fees
    536       790       165  
Market development
    68       144       16  
Communications and technology
    173       187       62  
Depreciation and amortization
    511       170       72  
Amortization of identifiable intangible assets
    38       84       39  
Occupancy
    241       236       82  
Professional fees
    135       178       58  
Other expenses
    382       402       203  
                         
Total non-compensation expenses
    2,084       2,191       697  
                         
Total operating expenses
    6,796       6,192       1,441  
                         
                         
Pre-tax earnings/(loss)
    2,629       2,143       (1,258 )
Provision/(benefit) for taxes
    815       632       (478 )
                         
Net earnings/(loss)
    1,814       1,511       (780 )
Preferred stock dividends
    155       44       248  
                         
Net earnings/(loss) applicable to common shareholders
  $ 1,659     $ 1,467     $ (1,028 )
                         
Earnings/(loss) per common share
                       
Basic
  $ 3.48     $ 3.39     $ (2.15 )
Diluted
    3.39       3.23       (2.15 )
                         
Dividends declared per common share
  $     $ 0.35     $ 0.47  (1)
                         
Average common shares outstanding
                       
Basic
    477.4       432.8       485.5  
Diluted
    489.2       453.5       485.5  
 
 
(1) Rounded to the nearest penny. Exact dividend amount was $0.4666666 per common share and was reflective of a four-month period (December 2008 through March 2009), due to the change in the firm’s fiscal year-end.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                         
    As of
    March
  November
  December
    2009   2008   2008
    (in millions, except share
    and per share amounts)
 
Assets
                       
Cash and cash equivalents
  $ 35,417     $ 15,740     $ 13,805  
Cash and securities segregated for regulatory and other purposes (includes $45,539, $78,830 and $69,549 at fair value as of March 2009, November 2008 and December 2008, respectively)
    69,586       106,664       112,499  
Collateralized agreements:
                       
Securities purchased under agreements to resell, at fair value, and federal funds sold (includes $142,655, $116,671 and $127,032 at fair value as of March 2009, November 2008 and December 2008, respectively)
    143,155       122,021       129,532  
Securities borrowed (includes $88,818, $59,810 and $86,057 at fair value as of March 2009, November 2008 and December 2008, respectively)
    228,245       180,795       203,341  
Receivables from brokers, dealers and clearing organizations
    20,421       25,899       28,038  
Receivables from customers and counterparties (includes $2,036, $1,598 and $2,474 at fair value as of March 2009, November 2008 and December 2008, respectively)
    50,065       64,665       58,339  
Trading assets, at fair value (includes $26,599, $26,313 and $42,004 pledged as collateral as of March 2009, November 2008 and December 2008, respectively)
    349,591       338,325       534,964  
Other assets
    28,810       30,438       31,707  
                         
Total assets
  $ 925,290     $ 884,547     $ 1,112,225  
                         
                         
Liabilities and shareholders’ equity
                       
Deposits (includes $6,781, $4,224 and $5,792 at fair value as of March 2009, November 2008 and December 2008, respectively)
  $ 44,504     $ 27,643     $ 32,130  
Collateralized financings:
                       
Securities sold under agreements to repurchase, at fair value
    133,395       62,883       260,421  
Securities loaned (includes $9,932, $7,872 and $11,276 at fair value as of March 2009, November 2008 and December 2008, respectively)
    18,928       17,060       21,576  
Other secured financings (includes $19,812, $20,249 and $20,172 at fair value as of March 2009, November 2008 and December 2008, respectively)
    39,793       38,683       39,045  
Payables to brokers, dealers and clearing organizations
    14,940       8,585       14,417  
Payables to customers and counterparties
    205,077       245,258       231,308  
Trading liabilities, at fair value
    147,221       175,972       186,031  
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $19,923, $23,075 and $25,600 at fair value as of March 2009, November 2008 and December 2008, respectively)
    44,596       52,658       54,093  
Unsecured long-term borrowings (includes $17,689, $17,446 and $18,146 at fair value as of March 2009, November 2008 and December 2008, respectively)
    188,534       168,220       185,564  
Other liabilities and accrued expenses (includes $1,922, $978 and $1,400 at fair value as of March 2009, November 2008 and December 2008, respectively)
    24,749       23,216       24,586  
                         
Total liabilities
    861,737       820,178       1,049,171  
                         
Commitments, contingencies and guarantees
                       
                         
Shareholders’ equity
                       
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $18,100 as of March 2009, November 2008 and December 2008
    16,507       16,471       16,483  
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 700,596,595, 680,953,836 and 680,986,058 shares issued as of March 2009, November 2008 and December 2008, respectively, and 462,273,124, 442,537,317 and 442,553,372 shares outstanding as of March 2009, November 2008 and December 2008, respectively
    7       7       7  
Restricted stock units and employee stock options
    4,761       9,284       9,463  
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding
                 
Additional paid-in capital
    34,429       31,071       31,070  
Retained earnings
    40,366       39,913       38,579  
Accumulated other comprehensive income/(loss)
    (357 )     (202 )     (372 )
Common stock held in treasury, at cost, par value $0.01 per share; 238,323,471, 238,416,519 and 238,432,686 shares as of March 2009, November 2008 and December 2008, respectively
    (32,160 )     (32,175 )     (32,176 )
                         
Total shareholders’ equity
    63,553       64,369       63,054  
                         
Total liabilities and shareholders’ equity
  $ 925,290     $ 884,547     $ 1,112,225  
                         
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                         
    Three Months
  Year Ended
  One Month
    Ended March   November   Ended December
    2009   2008   2008
    (in millions)
 
Preferred stock
                       
Balance, beginning of period
  $ 16,483     $ 3,100     $ 16,471  
Issued
          13,367        
Preferred stock accretion
    24       4       12  
                         
Balance, end of period
    16,507       16,471       16,483  
Common stock
                       
Balance, beginning of period
    7       6       7  
Issued
          1        
                         
Balance, end of period
    7       7       7  
Restricted stock units and employee stock options
                       
Balance, beginning of period
    9,463       9,302       9,284  
Issuance and amortization of restricted stock units and employee stock options
    498       2,254       192  
Delivery of common stock underlying restricted stock units
    (5,164 )     (1,995 )      
Forfeiture of restricted stock units and employee stock options
    (36 )     (274 )     (13 )
Exercise of employee stock options
          (3 )      
                         
Balance, end of period
    4,761       9,284       9,463  
Additional paid-in capital
                       
Balance, beginning of period
    31,070       22,027       31,071  
Issuance of common stock warrants
          1,633        
Issuance of common stock, including the delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options
    5,174       8,081       (1 )
Cancellation of restricted stock units in satisfaction of withholding tax requirements
    (847 )     (1,314 )      
Preferred and common stock issuance costs
          (1 )      
Excess net tax benefit/(provision) related to share-based compensation
    (968 )     645        
                         
Balance, end of period
    34,429       31,071       31,070  
Retained earnings
                       
Balance, beginning of period
    38,579       38,642       39,913  
Cumulative effect of adjustment from adoption of FIN 48
          (201 )      
                         
Balance, beginning of period, after cumulative effect of adjustments
    38,579       38,441       39,913  
Net earnings/(loss)
    1,814       2,322       (780 )
Dividends and dividend equivalents declared on common stock and restricted stock units
    (3 )     (642 )     (233 )
Dividends declared on preferred stock
          (204 )     (309 )
Preferred stock accretion
    (24 )     (4 )     (12 )
                         
Balance, end of period
    40,366       39,913       38,579  
Accumulated other comprehensive income/(loss)
                       
Balance, beginning of period
    (372 )     (118 )     (202 )
Currency translation adjustment, net of tax
    25       (98 )     (32 )
Pension and postretirement liability adjustment, net of tax
    9       69       (175 )
Net unrealized gains/(losses) on available-for-sale securities,
net of tax
    (19 )     (55 )     37  
                         
Balance, end of period
    (357 )     (202 )     (372 )
Common stock held in treasury, at cost
                       
Balance, beginning of period
    (32,176 )     (30,159 )     (32,175 )
Repurchased
    (2 (1)     (2,037 )     (1 (1)
Reissued
    18       21        
                         
Balance, end of period
    (32,160 )     (32,175 )     (32,176 )
                         
Total shareholders’ equity
  $ 63,553     $ 64,369     $ 63,054  
                         
 
 
(1) Relates to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business and shares withheld to satisfy withholding tax requirements.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                         
    Three Months
  Three Months
  One Month
    Ended March   Ended February   Ended December
    2009   2008   2008
    (in millions)
 
Cash flows from operating activities
                       
Net earnings/(loss)
  $ 1,814     $ 1,511     $ (780 )
Non-cash items included in net earnings
                       
Depreciation and amortization
    611       259       104  
Amortization of identifiable intangible assets
    38       84       39  
Share-based compensation
    468       480       180  
Changes in operating assets and liabilities
                       
Cash and securities segregated for regulatory and other purposes
    43,126       15,650       (5,835 )
Net receivables from brokers, dealers and clearing organizations
    8,140       (7,234 )     3,693  
Net payables to customers and counterparties
    (17,879 )     42,226       (7,635 )
Securities borrowed, net of securities loaned
    (27,552 )     (19,127 )     (18,030 )
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold
    (140,648 )     (20,263 )     190,027  
Trading assets, at fair value
    180,563       (46,347 )     (192,883 )
Trading liabilities, at fair value
    (38,810 )     15,037       10,059  
Other, net
    (6,674 )     (5,425 )     7,156  
                         
Net cash provided by/(used for) operating activities
    3,197       (23,149 )     (13,905 )
Cash flows from investing activities
                       
Purchase of property, leasehold improvements and equipment
    (278 )     (403 )     (61 )
Proceeds from sales of property, leasehold improvements and equipment
    28       42       4  
Business acquisitions, net of cash acquired
    (190 )     (2,156 )     (59 )
Proceeds from sales of investments
    75       26       141  
Purchase of available-for-sale securities
    (1,440 )     (1,109 )     (95 )
Proceeds from sales of available-for-sale securities
    892       647       26  
                         
Net cash used for investing activities
    (913 )     (2,953 )     (44 )
Cash flows from financing activities
                       
Unsecured short-term borrowings, net
    (4,680 )     879       2,816  
Other secured financings (short-term), net
    5,222       2,384       (1,068 )
Proceeds from issuance of other secured financings (long-term)
    2,322       4,107       437  
Repayment of other secured financings (long-term), including the current portion
    (2,435 )     (2,373 )     (349 )
Proceeds from issuance of unsecured long-term borrowings
    14,689       19,874       9,310  
Repayment of unsecured long-term borrowings, including the current portion
    (8,325 )     (8,461 )     (3,686 )
Derivative contracts with a financing element, net
    670       (420 )     66  
Deposits, net
    12,374       11,591       4,487  
Common stock repurchased
    (2 )     (1,561 )     (1 )
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units
    (545 )     (201 )      
Proceeds from issuance of common stock
    27       64       2  
Excess tax benefit related to share-based compensation
    11       552        
                         
Net cash provided by financing activities
    19,328       26,435       12,014  
                         
Net increase/(decrease) in cash and cash equivalents
    21,612       333       (1,935 )
Cash and cash equivalents, beginning of period
    13,805       10,282       15,740  
                         
Cash and cash equivalents, end of period
  $ 35,417     $ 10,615     $ 13,805  
                         
 
SUPPLEMENTAL DISCLOSURES:
 
Cash payments for interest, net of capitalized interest, were $3.42 billion, $10.64 billion and $459 million during the three months ended March 2009 and February 2008 and one month ended December 2008, respectively.
 
Cash payments for income taxes, net of refunds, were $256 million, $670 million and $171 million during the three months ended March 2009 and February 2008 and one month ended December 2008, respectively.
 
Non-cash activities:
The firm assumed $16 million, $534 million and $0 of debt in connection with business acquisitions during the three months ended March 2009 and February 2008 and one month ended December 2008, respectively. The firm did not issue any common stock in connection with business acquisitions for the three months ended March 2009 and February 2008 and one month ended December 2008.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                         
    Three Months
  Three Months
  One Month
    Ended March   Ended February   Ended December
    2009   2008   2008
    (in millions)
 
Net earnings/(loss)
  $ 1,814     $ 1,511     $ (780 )
Currency translation adjustment, net of tax
    25       9       (32 )
Pension and postretirement liability adjustment, net of tax
    9             (175 )
Net unrealized gains/(losses) on available-for-sale securities, net of tax
    (19 )     (35 )     37  
                         
Comprehensive income/(loss)
  $ 1,829     $ 1,485     $ (950 )
                         
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
Note 1.   Description of Business
 
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global financial services firm providing investment banking, securities and investment management services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.
 
The firm’s activities are divided into three segments:
 
  •  Investment Banking.  The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals.
 
  •  Trading and Principal Investments.  The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and takes proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, the firm engages in market-making and specialist activities on equities and options exchanges, and the firm clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages.
 
  •  Asset Management and Securities Services.  The firm provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide.
 
Note 2.   Significant Accounting Policies
 
 
These condensed consolidated financial statements include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. All material intercompany transactions and balances have been eliminated.
 
The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity, a variable interest entity (VIE) or a qualifying special-purpose entity (QSPE) under generally accepted accounting principles.
 
  •  Voting Interest Entities.  Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Voting interest entities are consolidated in accordance with Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” as amended. The usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest.


7


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  Variable Interest Entities.  VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) 46-R, “Consolidation of Variable Interest Entities,” the firm consolidates VIEs for which it is the primary beneficiary. The firm determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE’s expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, the firm performs a quantitative analysis. For purposes of allocating a VIE’s expected losses and expected residual returns to its variable interest holders, the firm utilizes the “top down” method. Under this method, the firm calculates its share of the VIE’s expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangements and/or the firm’s position in the capital structure of the VIE, under various probability-weighted scenarios. The firm reassesses its initial evaluation of an entity as a VIE and its initial determination of whether the firm is the primary beneficiary of a VIE upon the occurrence of certain reconsideration events as defined in FIN 46-R.
 
  •  QSPEs.  QSPEs are passive entities that are commonly used in mortgage and other securitization transactions. Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” sets forth the criteria an entity must satisfy to be a QSPE. These criteria include the 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, such as whether a derivative is considered passive and the level of discretion a servicer may exercise, including, for example, determining when default is reasonably foreseeable. In accordance with SFAS No. 140 and FIN 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 either in accordance with Accounting Principles Board Opinion (APB) No. 18, “The Equity Method of Accounting for Investments in Common Stock” or at fair value in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” In general, the firm accounts for investments acquired subsequent to the adoption of SFAS No. 159 at fair value. In certain cases, the firm may apply the equity method of accounting to new investments that 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, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of SFAS No. 159.


8


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  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. As a result, the firm does not consolidate these funds. These fund investments are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.
 
These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008. The condensed consolidated financial information as of November 28, 2008 has been derived from audited consolidated financial statements not included herein.
 
These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.
 
In connection with becoming a bank holding company, the firm was required to change its fiscal year-end from November to December. This change in the firm’s fiscal year-end resulted in a one-month transition period that began on November 29, 2008 and ended on December 26, 2008. Financial information for this fiscal transition period is included in these condensed consolidated financial statements. On April 13, 2009, the Board of Directors of Group Inc. (the Board) approved a change in the firm’s fiscal year-end from the last Friday of December to December 31, beginning with fiscal 2009. Fiscal 2009 began on December 27, 2008 and will end on December 31, 2009. The firm’s second and third fiscal quarters in 2009 will end on the last Friday of June and September, respectively. Beginning in the fourth quarter of 2009, the firm’s fiscal year will end on December 31.
 
In the condensed consolidated statements of earnings, cash flows and comprehensive income, the firm compares the three-month period ended March 27, 2009 with the previously reported three-month period ended February 29, 2008. Financial information for the three months ended March 28, 2008 has not been included in this Form 10-Q for the following reasons: (i) the three months ended February 29, 2008 provide a meaningful comparison for the three months ended March 27, 2009; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the three months ended March 28, 2008 were presented in lieu of results for the three months ended February 29, 2008; and (iii) it was not practicable or cost justified to prepare this information.
 
All references to March 2009 and February 2008, unless specifically stated otherwise, refer to the firm’s three-month fiscal periods ended, or the dates, as the context requires, March 27, 2009 and February 29, 2008, respectively. All references to December 2008, unless specifically stated otherwise, refer to the firm’s fiscal one-month transition period ended, or the date, as the context requires, December 26, 2008. All references to November 2008, unless specifically stated otherwise, refer to the firm’s fiscal year ended, or the date, as the context requires, November 28, 2008. All references to 2009, unless specifically stated otherwise, refer to the firm’s fiscal year ending, or the date, as the context requires, December 31, 2009. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.


9


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
These condensed 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 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 condensed 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.
 
Trading Assets and Trading Liabilities.  Substantially all trading assets and trading liabilities are reflected in the condensed consolidated statements of financial condition at fair value, pursuant principally to:
 
  •  SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities;”
 
  •  specialized industry accounting for broker-dealers and investment companies;
 
  •  SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” or
 
  •  the fair value option under either SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140,” or SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (i.e., the fair value option).
 
Related unrealized gains or losses are generally recognized in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
Other Financial Assets and Financial Liabilities at Fair Value.  In addition to “Trading assets, at fair value” and “Trading liabilities, at fair value,” the firm has elected to account for certain of its other financial assets and financial liabilities at fair value under the fair value option. The primary reasons for electing the fair value option are to reflect economic events in earnings on a timely basis, to mitigate volatility in earnings from using different measurement attributes and to address simplification and cost-benefit considerations.
 
Such financial assets and financial liabilities accounted for at fair value include:
 
  •  certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments;
 
  •  certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings;
 
  •  certain unsecured long-term borrowings, including prepaid physical commodity transactions;


10


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  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;
 
  •  certain certificates of deposit issued by Goldman Sachs Bank USA (GS Bank USA), as well as securities held by GS Bank USA;
 
  •  certain receivables from customers and counterparties, including transfers accounted for as secured loans rather than purchases under SFAS No. 140;
 
  •  certain insurance and reinsurance contracts; and
 
  •  in general, investments acquired after the adoption of SFAS No. 159 where the firm has significant influence over the investee and would otherwise apply the equity method of accounting.
 
Fair Value Measurements.  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 (i.e., the exit price). Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.
 
SFAS No. 157, “Fair Value Measurements,” 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 considered to be 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.
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
 
The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.
 
During the fourth quarter of 2008, both the FASB and the staff of the SEC re-emphasized the importance of sound fair value measurement in financial reporting. In October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This statement clarifies that determining fair value in an inactive or dislocated market depends on facts and circumstances and requires significant management judgment. This statement specifies that it is acceptable to use inputs based on management estimates or assumptions, or for management to make adjustments to observable inputs to determine


11


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
fair value when markets are not active and relevant observable inputs are not available. The firm’s fair value measurement policies are consistent with the guidance in FSP No. FAS 157-3.
 
Credit risk is an essential component of fair value. Cash products (e.g., bonds and loans) and derivative instruments (particularly those with significant future projected cash flows) trade in the market at levels which reflect credit considerations. The firm calculates the fair value of derivative assets by discounting future cash flows at a rate which incorporates counterparty credit spreads and the fair value of derivative liabilities by discounting future cash flows at a rate which incorporates the firm’s own credit spreads. In doing so, credit exposures are adjusted to reflect mitigants, namely collateral agreements which reduce exposures based on triggers and contractual posting requirements. The firm manages its exposure to credit risk as it does other market risks and will price, economically hedge, facilitate and intermediate trades which involve credit risk. The firm records liquidity valuation adjustments to reflect the cost of exiting concentrated risk positions, including exposure to the firm’s own credit spreads.
 
In determining fair value, the firm separates its “Trading assets, at fair value” and its “Trading liabilities, at fair value” into two categories: cash instruments and derivative contracts.
 
  •  Cash Instruments.  The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and sovereign obligations, active listed equities and certain money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. In accordance with SFAS No. 157, the firm does not adjust the quoted price for such instruments, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price.
 
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, investment-grade corporate bonds, certain mortgage products, certain bank loans and bridge loans, less liquid listed equities, state, municipal and provincial obligations and certain money market securities and loan commitments. Such instruments are generally classified within level 2 of the fair value hierarchy.
 
Certain cash instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity and real estate fund investments, certain bank loans and bridge loans (including certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt), less liquid corporate debt securities and other debt obligations (including less liquid high-yield corporate bonds, distressed debt instruments and collateralized debt obligations (CDOs) backed by corporate obligations), less liquid mortgage whole loans and securities (backed by either commercial or residential real estate), and acquired portfolios of distressed loans. The transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations


12


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.
 
For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used.
 
Recent market conditions, characterized by dislocations between asset classes, elevated levels of volatility, and reduced price transparency, have increased the level of management judgment required to value cash trading instruments classified within level 3 of the fair value hierarchy. In particular, management’s judgment is required to determine the appropriate risk-adjusted discount rate for cash trading instruments with little or no price transparency as a result of decreased volumes and lower levels of trading activity. In such situations, the firm’s valuation is adjusted to approximate rates which market participants would likely consider appropriate for relevant credit and liquidity risks.
 
  •  Derivative Contracts.  Derivative contracts can be exchange-traded or over-the-counter (OTC). Exchange-traded derivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The firm generally values exchange-traded derivatives using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy.
 
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. OTC derivatives are classified within level 2 of the fair value hierarchy when all of the significant inputs can be corroborated to market evidence.
 
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Where the firm does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3. Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or


13


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
dealer quotations, or other empirical market data. In circumstances where the firm cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.
 
When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used.
 
Collateralized Agreements and Financings.  Collateralized agreements consist of resale agreements and securities borrowed. Collateralized financings consist of repurchase agreements, securities loaned and other secured financings. Interest on collateralized agreements and collateralized financings is recognized in “Interest income” and “Interest expense,” respectively, over the life of the transaction.
 
  •  Resale and Repurchase Agreements.  Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions. The firm receives securities purchased under agreements to resell, makes delivery 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. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value under SFAS No. 159. Resale and repurchase agreements are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. Resale and repurchase agreements are presented on a net-by-counterparty basis when the requirements of FIN 41, “Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements,” or FIN 39, “Offsetting of Amounts Related to Certain Contracts,” are satisfied.
 
  •  Securities Borrowed and Loaned.  Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates. As noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value under SFAS No. 159. These securities borrowed and loaned transactions are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy.
 
  •  Other Secured Financings.  In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply SFAS No. 159 to transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. These other secured financing transactions are generally valued based on inputs with reasonable levels of price transparency and are generally classified within level 2 of the fair value hierarchy. Other


14


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
  secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings.
 
Hybrid Financial Instruments.  Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives under SFAS No. 133 and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative, it is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedge accounting relationships. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under SFAS No. 155. See Notes 3 and 6 for further information regarding hybrid financial instruments.
 
Transfers of Financial Assets.  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 revenues. Transfers that are not accounted for as sales are accounted for as collateralized financings, with the related interest expense recognized in net revenues over the life of the transaction.
 
Commissions.  Commission revenues from executing and clearing client transactions on stock, options and futures markets are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings on a trade-date basis.
 
Insurance Activities.  Certain of the firm’s insurance and reinsurance contracts are accounted for at fair value under SFAS No. 159, with changes in fair value included in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
Revenues from variable annuity and life insurance and reinsurance contracts not accounted for at fair value under SFAS No. 159 generally consist of fees assessed on contract holder account balances for mortality charges, policy administration fees and surrender charges, and are recognized within “Trading and principal investments” in the condensed consolidated statements of earnings in the period that services are provided.
 
Interest credited to variable annuity and life insurance and reinsurance contract account balances and changes in reserves are recognized in “Other expenses” in the condensed consolidated statements of earnings.
 
Premiums earned for underwriting property catastrophe reinsurance are recognized within “Trading and principal investments” in the condensed consolidated statements of earnings over the coverage period, net of premiums ceded for the cost of reinsurance. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are recognized within “Other expenses” in the condensed consolidated statements of earnings.
 
Merchant Banking Overrides.  The firm is entitled to receive merchant banking overrides (i.e., an increased share of a fund’s income and gains) when the return on the funds’ investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment underperformance may require amounts of override previously distributed to the firm to be returned to the funds. Accordingly, overrides are recognized in the condensed consolidated statements of earnings only when all material contingencies have been resolved. Overrides are included in “Trading and principal investments” in the condensed consolidated statements of earnings.


15


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Asset Management.  Management fees are recognized over the period that the related service is provided based upon average net asset values. In certain circumstances, the firm is also entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds specified benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a 12-month period and are subject to adjustment prior to the end of the measurement period. Accordingly, incentive fees are recognized in the condensed consolidated statements of earnings when the measurement period ends. Asset management fees and incentive fees are included in “Asset management and securities services” in the condensed consolidated statements of earnings.
 
 
The firm accounts for share-based compensation in accordance with SFAS No. 123-R, “Share-Based Payment.” The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based employee awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense. In the first quarter of 2006, the firm adopted SFAS No. 123-R under the modified prospective adoption method. Under this method of adoption, the provisions of SFAS No. 123-R are generally applied only to share-based awards granted subsequent to adoption. Share-based awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R continue to be amortized over the stated service period of the award.
 
The firm pays cash dividend equivalents on outstanding restricted stock units. Dividend equivalents paid on restricted stock units are generally charged to retained earnings. Dividend equivalents paid on restricted stock units expected to be forfeited are included in compensation expense. The firm adopted Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” in the first quarter of fiscal 2009. Accordingly, the tax benefit related to dividend equivalents paid on restricted stock units is accounted for as an increase to additional paid-in capital. Prior to the adoption of EITF Issue No. 06-11, the firm accounted for this tax benefit as a reduction to income tax expense. See “— Recent Accounting Developments” for further information on EITF Issue No. 06-11.
 
In certain cases, primarily related to the death of an employee or conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards. For awards accounted for as equity instruments, “Additional paid-in capital” is adjusted to the extent of the difference between the current value of the award and the grant-date value of the award.
 
 
Goodwill is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested at least annually for impairment. An impairment loss is recognized if the estimated fair value of an operating segment, which is a component one level below the firm’s three business segments, is less than its estimated net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.


16


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Identifiable intangible assets, which consist primarily of customer lists, Designated Market Maker (DMM) rights and the value of business acquired (VOBA) and deferred acquisition costs (DAC) in the firm’s insurance subsidiaries, are amortized over their estimated lives in accordance with SFAS No. 142 or, in the case of insurance contracts, in accordance with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 60 and SFAS No. 97. An impairment loss, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.
 
 
Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are recorded at cost and included in “Other assets” in the condensed consolidated statements of financial condition.
 
Substantially all property and equipment are depreciated on a straight-line basis over the useful life of the asset. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter. Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software.
 
Property, leasehold improvements and equipment are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the expected undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.
 
The firm’s operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy” in the condensed consolidated statements of earnings. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the firm records a liability, based on the fair value of the remaining lease rentals reduced by any potential or existing sublease rentals, for leases where the firm has ceased using the space and management has concluded that the firm will not derive any future economic benefits. Costs to terminate a lease before the end of its term are recognized and measured at fair value upon termination.
 
 
Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the condensed consolidated statements of financial condition, and revenues and expenses are translated at average rates of exchange for the period. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the condensed consolidated statements


17


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
of comprehensive income. The firm seeks to reduce its net investment exposure to fluctuations in foreign exchange rates through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts, hedge effectiveness is assessed based on changes in forward exchange rates; accordingly, forward points are reflected as a component of the currency translation adjustment in the condensed consolidated statements of comprehensive income. For foreign currency-denominated debt, hedge effectiveness is assessed based on changes in spot rates. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are included in the condensed consolidated statements of earnings.
 
 
Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of the firm’s assets and liabilities. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. The firm’s tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. Tax provisions are computed in accordance with SFAS No. 109, “Accounting for Income Taxes.” The firm adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” as of December 1, 2007, and recorded a transition adjustment resulting in a reduction of $201 million to beginning retained earnings in the first fiscal quarter of 2008. Under FIN 48, a tax position can be recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. The firm reports interest expense related to income tax matters in “Provision/(benefit) for taxes” in the condensed consolidated statements of earnings and income tax penalties in “Other expenses” in the condensed consolidated statements of earnings.
 
 
Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock units for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock warrants and options and to restricted stock units for which future service is required as a condition to the delivery of the underlying common stock. The firm adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” in the first quarter of fiscal 2009. Accordingly, the firm treats unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. See “— Recent Accounting Developments” for further information on FSP No. EITF 03-6-1.
 
 
The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of March 2009, November 2008 and December 2008, “Cash and cash equivalents” on the condensed consolidated statements of financial condition included $4.03 billion, $5.60 billion and $1.39 billion, respectively, of cash and due from banks and $31.39 billion, $10.14 billion and $12.41 billion, respectively, of interest-bearing deposits with banks.


18


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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 previously accounted for this tax benefit as a reduction to income tax expense. EITF Issue No. 06-11 was applied prospectively for tax benefits on dividends declared beginning in the first quarter of fiscal 2009. The adoption of EITF Issue No. 06-11 did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
FASB Staff Position No. FAS 140-3.  In February 2008, the FASB issued FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSP No. FAS 140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No. 140 unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. The firm adopted FSP No. FAS 140-3 for new transactions entered into after November 2008. The adoption of FSP No. FAS 140-3 did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
SFAS No. 161.  In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and was effective for the firm beginning in the one-month transition period ended December 2008. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 did not affect the firm’s financial condition, results of operations or cash flows.
 
FASB Staff Position No. EITF 03-6-1.  In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The firm adopted the FSP in the first quarter of fiscal 2009. There was no impact from the adoption of FSP No. EITF 03-6-1 to earnings per common share for the three months ended March 2009. The loss per common share for the one month ended December 2008 was computed in accordance with the FSP and the impact was a loss per common share of $0.03. Prior periods have not been restated due to immateriality.
 
SFAS No. 141(R).  In December 2007, the FASB issued a revision to SFAS No. 141, “Business Combinations.” SFAS No. 141(R) requires changes to the accounting for transaction costs, certain contingent assets and liabilities, and other balances in a business combination. In addition, in partial acquisitions, when control is obtained, the acquiring company must measure and record all of the target’s assets and liabilities, including goodwill, at fair value as if the entire target company had been acquired. The provisions of SFAS No. 141(R) apply to business combinations beginning in the first quarter of fiscal 2009. Adoption of SFAS No. 141(R) did not affect the firm’s financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.


19


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
SFAS No. 160.  In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 requires that ownership interests in consolidated subsidiaries held by parties other than the parent (i.e., noncontrolling interests) be accounted for and presented as equity, rather than as a liability or mezzanine equity. SFAS No. 160 was effective for the firm beginning in the first quarter of fiscal 2009. SFAS No. 160 did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
FASB Staff Position No. FAS 140-4 and FIN 46(R)-8.  In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities, and was effective for the firm beginning in the one-month transition period ended December 2008. Since the FSP requires only additional disclosures concerning transfers of financial assets and interests in variable interest entities, adoption of the FSP did not affect the firm’s financial condition, results of operations or cash flows.
 
EITF Issue No. 07-5.  In June 2008, the EITF reached consensus on Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF Issue No. 07-5 provides guidance about whether an instrument (such as the firm’s outstanding common stock warrants) should be classified as equity and not marked-to-market for accounting purposes. The firm adopted EITF Issue No. 07-5 in the first quarter of fiscal 2009. Adoption of EITF Issue No. 07-5 did not affect the firm’s financial condition, results of operations or cash flows.
 
FASB Staff Position No. FAS 157-4.  In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides guidance for estimating fair value when the volume and level of activity for an asset or liability have decreased significantly. Specifically, the FSP lists factors which should be evaluated to determine whether a transaction is orderly, clarifies that adjustments to transactions or quoted prices may be necessary when the volume and level of activity for an asset or liability have decreased significantly, and provides guidance for determining the concurrent weighting of the transaction price relative to fair value indications from other valuation techniques when estimating fair value. The FSP is effective for periods ending after June 15, 2009. Because the firm’s current fair value methodology is consistent with FSP No. FAS 157-4, adoption of the FSP will not affect the firm’s financial condition, results of operations or cash flows. The firm will adopt the FSP in the second quarter of fiscal 2009 to comply with the FSP’s disclosure requirements.
 
FASB Staff Position No. FAS 115-2 and FAS 124-2.  In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” Under the FSP, only the portion of an other-than-temporary impairment on a debt security related to credit loss is recognized in current period earnings, with the remainder recognized in other comprehensive income, if the holder does not intend to sell the security and it is more likely than not that the holder will not be required to sell the security prior to recovery. Currently, the entire other-than-temporary impairment is recognized in current period earnings. The FSP is effective for periods ending after June 15, 2009. The firm will adopt the FSP in the second quarter of fiscal 2009. Adoption of the FSP will not have a material effect on the firm’s financial condition, results of operations or cash flows.


20


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
FASB Staff Position No. FAS 107-1 and APB 28-1.  In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP requires that the fair value disclosures prescribed by FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” be included in financial statements prepared for interim periods. The FSP is effective for periods ending after June 15, 2009. The firm will adopt the FSP in the second quarter of fiscal 2009. Since the FSP involves only additional disclosures regarding the fair value of financial instruments, adoption of the FSP will not affect the firm’s financial condition, results of operations or cash flows.
 
Note 3.   Financial Instruments
 
 
The following table sets forth the firm’s trading assets, at fair value, including those pledged as collateral, and trading liabilities, at fair value. At any point in time, the firm may use cash instruments as well as derivatives to manage a long or short risk position.
 
                                                 
    As of
    March 2009   November 2008   December 2008
   
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 13,983  (1)   $     $ 8,662  (1)   $     $ 18,605  (1)   $  
U.S. government, federal agency and sovereign obligations
    125,481       33,215       69,653       37,000       263,631       46,185  
Mortgage and other asset-backed loans and securities
    15,446       141       22,393       340       20,094       176  
Bank loans and bridge loans
    21,211       2,638  (4)     21,839       3,108  (4)     20,516       3,129  (4)
Corporate debt securities and other debt obligations
    24,829       6,360       27,879       5,711       25,829       6,958  
Equities and convertible debentures
    43,134       14,247       57,049       12,116       57,887       7,961  
Physical commodities
    1,182             513       2       916        
Derivative contracts
    104,325  (2)     90,620  (5)     130,337  (2)     117,695  (5)     127,486  (2)     121,622  (5)
                                                 
Total
  $ 349,591  (3)   $ 147,221     $ 338,325  (3)   $ 175,972     $ 534,964  (3)   $ 186,031  
                                                 
 
 
(1) Includes $4.44 billion, $4.40 billion and $4.46 billion as of March 2009, November 2008 and December 2008, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 8 for further information regarding the William Street program.
 
(2) Net of cash received pursuant to credit support agreements of $149.08 billion, $137.16 billion and $154.69 billion as of March 2009, November 2008 and December 2008, respectively.
 
(3) Includes $2.34 billion, $1.68 billion and $1.71 billion as of March 2009, November 2008 and December 2008, respectively, of securities held within the firm’s insurance subsidiaries which are accounted for as available-for-sale under SFAS No. 115.
 
(4) Consists of the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets.
 
(5) Net of cash paid pursuant to credit support agreements of $27.07 billion, $34.01 billion and $32.91 billion as of March 2009, November 2008 and December 2008, respectively.


21


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Fair Value Hierarchy
 
The firm’s financial assets at fair value classified within level 3 of the fair value hierarchy are summarized below:
 
                         
    As of
    March
  November
  December
    2009   2008   2008
    ($ in millions)
Total level 3 assets
  $ 59,062     $ 66,190     $ 64,167  
Level 3 assets for which the firm bears economic exposure (1)
    54,660       59,574       58,000  
                         
Total assets
    925,290       884,547       1,112,225  
Total financial assets at fair value
    628,639       595,234       820,076  
                         
Total level 3 assets as a percentage of Total assets
    6.4 %     7.5 %     5.8 %
Level 3 assets for which the firm bears economic exposure as a percentage of Total assets
    5.9       6.7       5.2  
                         
Total level 3 assets as a percentage of Total financial assets at fair value
    9.4       11.1       7.8  
Level 3 assets for which the firm bears economic exposure as a percentage of Total financial assets at fair value
    8.7       10.0       7.1  
 
 
(1) Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
The following tables set forth by level within the fair value hierarchy “Trading assets, at fair value,” “Trading liabilities, at fair value,” and other financial assets and financial liabilities accounted for at fair value under SFAS No. 155 and SFAS No. 159 as of March 2009, November 2008 and December 2008. See Note 2 for further information on the fair value hierarchy. As required by SFAS No. 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


22


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                         
    Financial Assets at Fair Value as of March 2009
                Netting and
   
   
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 7,680     $ 6,303     $     $     $ 13,983  
U.S. government, federal agency and sovereign obligations
    67,839       57,642                   125,481  
Mortgage and other asset-backed loans and securities
          3,802       11,644             15,446  
Bank loans and bridge loans
          11,345       9,866             21,211  
Corporate debt securities and other debt obligations
    223       17,052       7,554             24,829  
Equities and convertible debentures
    15,340       14,174       13,620   (6)           43,134  
Physical commodities
          1,182                   1,182