This excerpt taken from the GHL 10-K filed Mar 11, 2005.
Financial Advisory Fees
The Company recognizes advisory fee revenue when the services related to the underlying transactions are completed in accordance with the terms of its engagement letters. Retainer fees are recognized as advisory fee income over the period in which the related service is rendered.
The Companys clients reimburse certain expenses incurred by the Company in the conduct of financial advisory engagements. Expenses are reported net of such client reimbursements. Client reimbursements totaled $3.0 million, $2.6 million and $4.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Merchant Banking Revenues
Merchant banking revenue consists of (i) management fees on the Companys merchant banking activities, (ii) gains (or losses) on investments in the Companys investment in merchant banking funds and other principal investment activities, and (iii) merchant banking profit overrides.
Management fees earned from the Companys merchant banking activities are recognized over the period of related service.
The Company recognizes revenue on investments in its merchant banking funds based on its allocable share of realized and unrealized gains (or losses) reported by such investments.
The Company recognizes merchant banking overrides when certain financial returns are achieved over the life of the fund. Overrides are calculated as a percentage of the profits earned by each fund. Future losses (if any) in the value of the funds investments may require amounts previously recognized as overrides to be adjusted downward. Accordingly, merchant banking overrides are recognized as revenue only after material contingencies have been resolved. See Note 3 Investments for further discussion of the GCP revenues recognized.