UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

¨ 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.

(Exact name of registrant as specified in its charter)

Delaware	13-4019460
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
200 West Street, New York, N.Y.	10282
(Address of principal executive offices)	(Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

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 ¨ 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).

x Yes ¨ 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  ¨

Non-accelerated filer  ¨ (Do not  check if a smaller reporting company)        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of October 17, 2014, there were 435,545,529 shares of the registrant’s common stock outstanding.

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014

INDEX

Form 10-Q Item Number		Page No.
PART I	FINANCIAL INFORMATION	2
Item 1	Financial Statements (Unaudited)	2
	Condensed Consolidated Statements of Earnings for the three and nine months ended September  30, 2014 and September 30, 2013	2
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and September 30, 2013	3
	Condensed Consolidated Statements of Financial Condition as of September 30,  2014 and December 31, 2013	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and year ended December 31, 2013	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,  2014 and September 30, 2013	6
	Notes to Condensed Consolidated Financial Statements	7
	Note 1.        Description of Business	7
	Note 2.        Basis of Presentation	7
	Note 3.        Significant Accounting Policies	8
	Note 4.         Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not                      Yet Purchased, at Fair Value	13
	Note 5.        Fair Value Measurements	14
	Note 6.        Cash Instruments	16
	Note 7.        Derivatives and Hedging Activities	27
	Note 8.        Fair Value Option	43
	Note 9.        Collateralized Agreements and Financings	52
	Note 10.      Securitization Activities	57
	Note 11.      Variable Interest Entities	59
	Note 12.      Other Assets	64
	Note 13.      Goodwill and Identifiable Intangible Assets	65
	Note 14.      Deposits	66
	Note 15.      Short-Term Borrowings	67
	Note 16.      Long-Term Borrowings	68
	Note 17.      Other Liabilities and Accrued Expenses	70
	Note 18.      Commitments, Contingencies and Guarantees	71
	Note 19.      Shareholders’ Equity	77
	Note 20.      Regulation and Capital Adequacy	80
	Note 21.      Earnings Per Common Share	89
	Note 22.      Transactions with Affiliated Funds	89
	Note 23.      Interest Income and Interest Expense	90
	Note 24.      Income Taxes	91
	Note 25.      Business Segments	92
	Note 26.      Credit Concentrations	94
	Note 27.      Legal Proceedings	95
	Report of Independent Registered Public Accounting Firm	103
	Statistical Disclosures	104
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	106
Item 3	Quantitative and Qualitative Disclosures About Market Risk	183
Item 4	Controls and Procedures	183
PART II	OTHER INFORMATION	184
Item 1	Legal Proceedings	184
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	184
Item 5	Other Information	184
Item 6	Exhibits	185
SIGNATURES		186

Goldman Sachs September 2014 Form 10-Q 1

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Unaudited)

	Three Months Ended September			Nine Months Ended September
in millions, except per share amounts		2014	2013		2014	2013
Revenues
Investment banking		$1,464	$1,166		$  5,024	$  4,286
Investment management		1,386	1,153		4,262	3,670
Commissions and fees		783	765		2,441	2,467
Market making		2,087	1,364		6,911	7,493
Other principal transactions		1,618	1,434		5,116	4,917
Total non-interest revenues		7,338	5,882		23,754	22,833
Interest income		2,297	2,398		7,470	7,669
Interest expense		1,248	1,558		4,384	5,078
Net interest income		1,049	840		3,086	2,591
Net revenues, including net interest income		8,387	6,722		26,840	25,424
Operating expenses
Compensation and benefits		2,801	2,382		10,736	10,424
Brokerage, clearing, exchange and distribution fees		624	573		1,832	1,747
Market development		129	117		408	398
Communications and technology		190	202		576	572
Depreciation and amortization		301	280		985	848
Occupancy		212	205		627	633
Professional fees		220	211		656	675
Insurance reserves		—	—		—	176
Other expenses		605	585		1,873	1,766
Total non-compensation expenses		2,281	2,173		6,957	6,815
Total operating expenses		5,082	4,555		17,693	17,239
Pre-tax earnings		3,305	2,167		9,147	8,185
Provision for taxes		1,064	650		2,836	2,477
Net earnings		2,241	1,517		6,311	5,708
Preferred stock dividends		98	88		266	230
Net earnings applicable to common shareholders		$2,143	$1,429		$  6,045	$  5,478
Earnings per common share
Basic		$  4.69	$  3.07		$  13.05	$  11.55
Diluted		4.57	2.88		12.69	10.89
Dividends declared per common share		$  0.55	$  0.50		$    1.65	$    1.50
Average common shares outstanding
Basic		455.5	463.4		461.8	472.7
Diluted		469.2	496.4		476.5	503.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

2 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September					Nine Months Ended September
$ in millions		2014		2013			2014		2013
Net earnings		$2,241		$1,517			$6,311		$5,708
Other comprehensive income/(loss) adjustments, net of tax:
Currency translation		(44	)	(19	)		(103	)	(75	)
Pension and postretirement liabilities		(7	)	(4	)		(21	)	(11	)
Available-for-sale securities		—		—			—		(327	)
Cash flow hedges		3		6			5		6
Other comprehensive loss		(48	)	(17	)		(119	)	(407	)
Comprehensive income		$2,193		$1,500			$6,192		$5,301

The accompanying notes are an integral part of these condensed consolidated financial statements.

Goldman Sachs September 2014 Form 10-Q 3

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)

	As of
$ in millions, except per share amounts		September 2014		December 2013
Assets
Cash and cash equivalents		$  54,150		$  61,133
Cash and securities segregated for regulatory and other purposes (includes $27,986 and $31,937 at fair value as of September 2014 and December 2013, respectively)		44,190		49,671
Collateralized agreements:
Securities purchased under agreements to resell and federal funds sold (includes $125,047 and $161,297 at fair value as of September 2014 and December 2013, respectively)		125,669		161,732
Securities borrowed (includes $71,139 and $60,384 at fair value as of September 2014 and December 2013, respectively)		172,372		164,566
Receivables from:
Brokers, dealers and clearing organizations		27,380		23,840
Customers and counterparties (includes $7,723 and $7,416 at fair value as of September 2014 and December 2013, respectively)		97,626		88,935
Financial instruments owned, at fair value (includes $69,185 and $62,348 pledged as collateral as of September 2014 and December 2013, respectively)		325,326		339,121
Other assets (includes $18 at fair value as of December 2013)		22,220		22,509
Total assets		$868,933		$911,507
Liabilities and shareholders’ equity
Deposits (includes $11,733 and $7,255 at fair value as of September 2014 and December 2013, respectively)		$  77,951		$  70,807
Collateralized financings:
Securities sold under agreements to repurchase, at fair value		96,660		164,782
Securities loaned (includes $1,163 and $973 at fair value as of September 2014 and December 2013, respectively)		6,337		18,745
Other secured financings (includes $24,301 and $23,591 at fair value as of September 2014 and December 2013, respectively)		25,910		24,814
Payables to:
Brokers, dealers and clearing organizations		13,115		5,349
Customers and counterparties		206,232		199,416
Financial instruments sold, but not yet purchased, at fair value		132,021		127,426
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $19,019 and $19,067 at fair value as of September 2014 and December 2013, respectively)		48,282		44,692
Unsecured long-term borrowings (includes $15,124 and $11,691 at fair value as of September 2014 and December 2013, respectively)		165,304		160,965
Other liabilities and accrued expenses (includes $574 and $388 at fair value as of September 2014 and December 2013, respectively)		14,846		16,044
Total liabilities		786,658		833,040
Commitments, contingencies and guarantees
Shareholders’ equity
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $9,200 and $7,200 as of September 2014 and December 2013, respectively		9,200		7,200
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 851,632,488 and 837,219,068 shares issued as of September 2014 and December 2013, respectively, and 435,734,150 and 446,359,012 shares outstanding as of September 2014 and December 2013, respectively		9		8
Restricted stock units and employee stock options		3,687		3,839
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding		—		—
Additional paid-in capital		50,016		48,998
Retained earnings		77,227		71,961
Accumulated other comprehensive loss		(643	)	(524	)
Stock held in treasury, at cost, par value $0.01 per share; 415,898,340 and 390,860,058 shares as of September 2014 and December 2013, respectively		(57,221	)	(53,015	)
Total shareholders’ equity		82,275		78,467
Total liabilities and shareholders’ equity		$868,933		$911,507

The accompanying notes are an integral part of these condensed consolidated financial statements.

4 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

	Nine Months Ended			Year Ended
$ in millions		September 2014			December 2013
Preferred stock
Balance, beginning of year		$   7,200			$   6,200
Issued		2,000			1,000
Balance, end of period		9,200			7,200
Common stock
Balance, beginning of year		8			8
Issued		1			—
Balance, end of period		9			8
Restricted stock units and employee stock options
Balance, beginning of year		3,839			3,298
Issuance and amortization of restricted stock units and employee stock options		1,904			2,017
Delivery of common stock underlying restricted stock units		(1,720	)		(1,378	)
Forfeiture of restricted stock units and employee stock options		(52	)		(79	)
Exercise of employee stock options		(284	)		(19	)
Balance, end of period		3,687			3,839
Additional paid-in capital
Balance, beginning of year		48,998			48,030
Delivery of common stock underlying share-based awards		2,109			1,483
Cancellation of restricted stock units and employee stock options in satisfaction of withholding tax requirements		(1,775	)		(599	)
Preferred stock issuance costs		(20	)		(9	)
Excess net tax benefit related to share-based awards		705			94
Cash settlement of share-based compensation		(1	)		(1	)
Balance, end of period		50,016			48,998
Retained earnings
Balance, beginning of year		71,961			65,223
Net earnings		6,311			8,040
Dividends and dividend equivalents declared on common stock and restricted stock units		(779	)		(988	)
Dividends declared on preferred stock		(266	)		(314	)
Balance, end of period		77,227			71,961
Accumulated other comprehensive loss
Balance, beginning of year		(524	)		(193	)
Other comprehensive loss		(119	)		(331	)
Balance, end of period		(643	)		(524	)
Stock held in treasury, at cost
Balance, beginning of year		(53,015	)		(46,850	)
Repurchased		(4,219	)		(6,175	)
Reissued		46			40
Other		(33	)		(30	)
Balance, end of period		(57,221	)		(53,015	)
Total shareholders’ equity		$ 82,275			$ 78,467

The accompanying notes are an integral part of these condensed consolidated financial statements.

Goldman Sachs September 2014 Form 10-Q 5

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September
$ in millions		2014		2013
Cash flows from operating activities
Net earnings		$   6,311		$   5,708
Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities
Depreciation and amortization		985		848
Share-based compensation		1,931		1,821
Gain on extinguishment of junior subordinated debt		(270	)	—
Changes in operating assets and liabilities
Cash and securities segregated for regulatory and other purposes		5,480		(4,346	)
Receivables and payables, net		12,952		5,817
Collateralized transactions (excluding other secured financings), net		(52,273	)	(75,448	)
Financial instruments owned, at fair value		13,228		65,520
Financial instruments sold, but not yet purchased, at fair value		4,580		5,011
Other, net		(5,515	)	(2,668	)
Net cash provided by/(used for) operating activities		(12,591	)	2,263
Cash flows from investing activities
Purchase of property, leasehold improvements and equipment		(508	)	(498	)
Proceeds from sales of property, leasehold improvements and equipment		17		57
Business acquisitions, net of cash acquired		(626	)	(1,266	)
Proceeds from sales of investments		1,127		1,840
Purchase of available-for-sale securities		—		(738	)
Proceeds from sales of available-for-sale securities		—		817
Loans held for investment, net		(10,601	)	(6,027	)
Net cash used for investing activities		(10,591	)	(5,815	)
Cash flows from financing activities
Unsecured short-term borrowings, net		1,417		135
Other secured financings (short-term), net		417		(6,415	)
Proceeds from issuance of other secured financings (long-term)		5,700		4,883
Repayment of other secured financings (long-term), including the current portion		(5,562	)	(2,032	)
Proceeds from issuance of unsecured long-term borrowings		30,402		26,578
Repayment of unsecured long-term borrowings, including the current portion		(19,940	)	(24,461	)
Purchase of trust preferred securities		(1,429	)	—
Derivative contracts with a financing element, net		550		829
Deposits, net		7,144		1,446
Common stock repurchased		(4,219	)	(4,775	)
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units		(1,045	)	(956	)
Proceeds from issuance of preferred stock, net of issuance costs		1,980		991
Proceeds from issuance of common stock, including stock option exercises		79		49
Excess tax benefit related to share-based compensation		706		90
Cash settlement of share-based compensation		(1	)	(1	)
Net cash provided by/(used for) financing activities		16,199		(3,639	)
Net decrease in cash and cash equivalents		(6,983	)	(7,191	)
Cash and cash equivalents, beginning of year		61,133		72,669
Cash and cash equivalents, end of period		$ 54,150		$ 65,478

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $5.45 billion and $4.68 billion during the nine months ended September 2014 and September 2013, respectively.

Cash payments for income taxes, net of refunds, were $2.51 billion and $3.81 billion during the nine months ended September 2014 and September 2013, respectively.

Non-cash activities:

The firm exchanged $1.59 billion of Trust Preferred Securities, common beneficial interests and senior guaranteed trust securities held by the firm for $1.86 billion of the firm’s junior subordinated debt held by the issuing trusts during the nine months ended September 2014. Following the exchange, this junior subordinated debt was extinguished.

The accompanying notes are an integral part of these condensed consolidated financial statements.

6 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 investment banking, securities and investment management firm that provides a wide range of financial 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 all major financial centers around the world.

The firm reports its activities in the following four business segments:

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, risk management, restructurings and spin-offs, and debt and equity underwriting of public offerings and private placements, including domestic and cross-border transactions, as well as derivative transactions directly related to these activities.

Institutional Client Services

The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.

Investing & Lending

The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, some of which are consolidated, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities and real estate entities.

Investment Management

The firm provides investment management 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 set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Note 2.

Basis of Presentation

These condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.

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 year ended December 31, 2013. References to “the 2013 Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2013. The condensed consolidated financial information as of December 31, 2013 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.

All references to September 2014, June 2014, December 2013 and September 2013 refer to the firm’s periods ended, or the dates, as the context requires, September 30, 2014, June 30, 2014, December 31, 2013 and September 30, 2013, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

Goldman Sachs September 2014 Form 10-Q 7

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3.

Significant Accounting Policies

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 11 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value	Note 4
Fair Value Measurements	Note 5
Cash Instruments	Note 6
Derivatives and Hedging Activities	Note 7
Fair Value Option	Note 8
Collateralized Agreements and Financings	Note 9
Securitization Activities	Note 10
Variable Interest Entities	Note 11
Other Assets	Note 12
Goodwill and Identifiable Intangible Assets	Note 13
Deposits	Note 14
Short-Term Borrowings	Note 15
Long-Term Borrowings	Note 16
Other Liabilities and Accrued Expenses	Note 17
Commitments, Contingencies and Guarantees	Note 18
Shareholders’ Equity	Note 19
Regulation and Capital Adequacy	Note 20
Earnings Per Common Share	Note 21
Transactions with Affiliated Funds	Note 22
Interest Income and Interest Expense	Note 23
Income Taxes	Note 24
Business Segments	Note 25
Credit Concentrations	Note 26
Legal Proceedings	Note 27

Consolidation

The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

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 power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a majority voting interest in a voting interest entity, the entity is consolidated.

Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 11 for further information about VIEs.

Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

In general, the firm accounts for investments acquired after the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 12 for further information about equity-method investments.

8 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are included in “Financial instruments owned, at fair value.” See Notes 6, 18 and 22 for further information about investments in funds.

Use of Estimates

Preparation of these condensed consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provisions for losses that may arise from litigation, regulatory proceedings and tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. 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. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Investment Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.

Investment Management. The firm earns management fees and incentive fees for investment management services. Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or commitments and are received quarterly, semi-annually or annually, depending on the fund. All management fees are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.

The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds. These payments are computed based on either a percentage of the management fee or the investment fund’s net asset value. Where the firm is principal to the arrangement, such costs are recorded on a gross basis and included in “Brokerage, clearing, exchange and distribution fees,” and where the firm is agent to the arrangement, such costs are recorded on a net basis in “Investment management” revenues.

Goldman Sachs September 2014 Form 10-Q 9

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Commissions and Fees. The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets. Commissions and fees are recognized on the day the trade is executed.

Transfers of Assets

Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are measured at fair value. For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 9 for further information about transfers of assets accounted for as collateralized financings and Note 10 for further information about transfers of assets accounted for as sales.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of September 2014 and December 2013, “Cash and cash equivalents” included $6.97 billion and $4.14 billion, respectively, of cash and due from banks, and $47.18 billion and $56.99 billion, respectively, of interest-bearing deposits with banks.

Receivables from Customers and Counterparties

Receivables from customers and counterparties generally relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, certain transfers of assets accounted for as secured loans rather than purchases at fair value, collateral posted in connection with certain derivative transactions, and loans held for investment. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. Receivables from customers and counterparties not accounted for at fair value, including loans held for investment, are accounted for at amortized cost net of estimated uncollectible amounts. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.” See Note 8 for further information about receivables from customers and counterparties.

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Receivables from and payables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6, 7 and 8. Had these receivables and payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of September 2014 and December 2013.

Payables to Customers and Counterparties

Payables to customers and counterparties primarily consist of customer credit balances related to the firm’s prime brokerage activities. Payables to customers and counterparties are accounted for at cost plus accrued interest, which generally approximates fair value. While these payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6, 7 and 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of September 2014 and December 2013.

10 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Offsetting Assets and Liabilities

To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that permit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a non-defaulting party. Upon exercise of such termination rights, all transactions governed by the netting agreement are terminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements or similar arrangements (collectively, credit support agreements). An enforceable credit support agreement grants the non-defaulting party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm’s right of setoff under netting and credit support agreements, the firm evaluates various factors including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the condensed consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Resale and repurchase agreements and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the condensed consolidated statements of financial condition when such transactions meet certain settlement criteria and are subject to netting agreements.

In the condensed consolidated statements of financial condition, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the condensed consolidated statements of financial condition, resale and repurchase agreements, and securities borrowed and loaned, are not reported net of the related cash and securities received or posted as collateral. See Note 9 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 9 for further information about offsetting.

Share-based Compensation

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 awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense.

The firm pays cash dividend equivalents on outstanding restricted stock units (RSUs). Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.

The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award.

Foreign Currency Translation

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. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. 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 of comprehensive income.

Goldman Sachs September 2014 Form 10-Q 11

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recent Accounting Developments

Investment Companies (ASC 946). In June 2013, the FASB issued ASU No. 2013-08, “Financial Services — Investment Companies (Topic 946) — Amendments to the Scope, Measurement, and Disclosure Requirements.” ASU No. 2013-08 clarifies the approach to be used for determining whether an entity is an investment company and provides new measurement and disclosure requirements. ASU No. 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Adoption of ASU No. 2013-08 on January 1, 2014 did not affect the firm’s financial condition, results of operations, or cash flows.

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASC 815). In July 2013, the FASB issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815) — Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes. The ASU also removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 was effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and adoption did not materially affect the firm’s financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers (ASC 606). In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The firm is still evaluating the effect of the ASU on its financial condition, results of operations, and cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASC 860). In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860) — Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 changes the accounting for repurchase- and resale-to-maturity agreements by requiring that such agreements be recognized as financing arrangements, and requires that a transfer of a financial asset and a repurchase agreement entered into contemporaneously be accounted for separately. ASU No. 2014-11 also requires additional disclosures about certain transferred financial assets accounted for as sales and certain securities financing transactions. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales are effective for the first interim and annual reporting periods beginning after December 15, 2014. The additional disclosures for securities financing transactions are required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Early adoption is not permitted. Adoption of ASU No. 2014-11 is not expected to materially affect the firm’s financial condition, results of operations, or cash flows.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASU 810). In August 2014, the FASB issued ASU No. 2014-13, “Consolidation (Topic 810) — Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (CFE).” ASU No. 2014-13 provides an alternative to reflect changes in the fair value of the financial assets and the financial liabilities of the CFE by measuring either the fair value of the assets or liabilities, whichever is more observable. ASU No. 2014-13 provides new disclosure requirements for those electing this approach, and is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. Adoption of ASU No. 2014-13 will not materially affect the firm’s financial condition, results of operations, or cash flows.

12 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4.

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about other financial assets and

financial liabilities accounted for at fair value primarily under the fair value option. The table below presents the firm’s financial instruments owned, at fair value, including those pledged as collateral, and financial instruments sold, but not yet purchased, at fair value.

	As of September 2014				As of December 2013
$ in millions		Financial Instruments Owned	Financial Instruments Sold, But Not Yet Purchased			Financial Instruments Owned	Financial Instruments Sold, But Not Yet Purchased
Commercial paper, certificates of deposit, time deposits and other money market instruments		$    4,884	$          —			$    8,608	$          —
U.S. government and federal agency obligations		59,915	16,794			71,072	20,920
Non-U.S. government and agency obligations		38,825	21,559			40,944	26,999
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		5,826	21			6,596	1
Loans and securities backed by residential real estate		11,259	1			9,025	2
Bank loans and bridge loans		16,203	600	1		17,400	925	1
Corporate debt securities		21,399	5,312			17,412	5,253
State and municipal obligations		1,249	—			1,476	51
Other debt obligations		3,204	3			3,129	4
Equities and convertible debentures		101,970	31,606			101,024	22,583
Commodities		3,963	1,799			4,556	966
Subtotal		268,697	77,695			281,242	77,704
Derivatives		56,629	54,326			57,879	49,722
Total		$325,326	$132,021			$339,121	$127,426

1. Primarily relates to the fair value of unfunded lending commitments for which the fair value option was elected.

Goldman Sachs September 2014 Form 10-Q 13

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Gains and Losses from Market Making and Other Principal Transactions

The table below presents “Market making” revenues by major product type, as well as “Other principal transactions” revenues. These gains/(losses) are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

The gains/(losses) in the table below are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

$ in millions Product Type	Three Months Ended September					Nine Months Ended September
		2014		2013			2014		2013
Interest rates		$(2,811	) 2	$ 1,546			$ (3,267	) 2	$     513
Credit		497		155			2,699		1,609
Currencies		3,689		(1,318	)		4,545		2,042
Equities		498		857			1,725		2,126
Commodities		214		187			1,209		836
Other		—		(63	)		—		367
Market making		2,087		1,364			6,911		7,493
Other principal transactions 1		1,618		1,434			5,116		4,917
Total		$ 3,705		$ 2,798			$12,027		$12,410

1. Other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending. The “Other” category in Note 25 relates to the firm’s consolidated investment entities, and primarily includes commodities and real estate-related net revenues.

2. Includes a gain of $270 million related to the extinguishment of the firm’s junior subordinated debt. See Note 16 for further information.

Note 5.

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. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).

The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread, or difference, between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement.

14 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair value hierarchy is as follows:

Level 1. Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs to valuation techniques are observable, either directly or indirectly.

Level 3. One or more inputs to valuation techniques are significant and unobservable.

The fair values for substantially all of the firm’s financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.

See Notes 6, 7 and 8 for further information about fair value measurements of cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value primarily under the fair value option (including information about significant unrealized gains and losses related to level 3 financial assets and financial liabilities, and transfers in and out of level 3), respectively.

The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP. In the table below, counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

	As of
$ in millions		September 2014		June 2014		December 2013
Total level 1 financial assets		$ 143,586		$153,025		$156,030
Total level 2 financial assets		472,667		441,295		499,480
Total level 3 financial assets		40,976		39,760		40,013
Counterparty and cash collateral netting		(100,008	)	(96,842	)	(95,350	)
Total financial assets at fair value		$ 557,221		$537,238		$600,173
Total assets 1		$ 868,933		$859,914		$911,507
Total level 3 financial assets as a percentage of Total assets		4.7%		4.6%		4.4%
Total level 3 financial assets as a percentage of Total financial assets at fair value		7.4%		7.4%		6.7%
Total level 1 financial liabilities		$   68,274		$  67,579		$  68,412
Total level 2 financial liabilities		249,247		247,288		300,583
Total level 3 financial liabilities		14,180		12,389		12,046
Counterparty and cash collateral netting		(31,106	)	(27,811	)	(25,868	)
Total financial liabilities at fair value		$ 300,595		$299,445		$355,173
Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value		4.7%		4.1%		3.4%

1. Includes approximately $847 billion, $837 billion and $890 billion as of September 2014, June 2014 and December 2013, respectively, that is carried at fair value or at amounts that generally approximate fair value.

Level 3 financial assets as of September 2014 increased compared with June 2014, primarily reflecting an increase in corporate debt securities and loans and securities backed by commercial real estate, partially offset by a decrease in bank loans and bridge loans. The increase in corporate debt securities primarily reflected purchases and net transfers from level 2, partially offset by settlements and sales. The increase in loans and securities backed by commercial real estate primarily reflected net transfers from level 2. The decrease in bank loans and bridge loans primarily reflected settlements, partially offset by purchases.

Level 3 financial assets as of September 2014 increased compared with December 2013, primarily reflecting an increase in equities and convertible debentures, corporate debt securities and loans and securities backed by commercial real estate, partially offset by a decrease in bank loans and bridge loans and derivative assets. The increase in equities and convertible debentures primarily reflected purchases and net unrealized gains, partially offset by sales, settlements and net transfers to level 2. The increase in corporate debt securities primarily reflected purchases, partially offset by sales and settlements. The increase in loans and securities backed by commercial real estate primarily reflected purchases, partially offset by settlements and sales. The decrease in bank loans and bridge loans primarily reflected settlements and sales, partially offset by purchases. The decrease in derivative assets primarily reflected a decline in credit derivative assets, principally due to settlements, partially offset by net unrealized gains.

Goldman Sachs September 2014 Form 10-Q 15

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6.

Cash Instruments

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities, certain government agency obligations and money market instruments. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

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.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid listed equities, most state and municipal obligations and certain lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of financial assets.

16 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Valuation Techniques and Significant Inputs

The table below presents the valuation techniques and the nature of significant inputs. These valuation techniques and

significant inputs are generally used to determine the fair values of each type of level 3 cash instrument.

Level 3 Cash Instruments	Valuation Techniques and Significant Inputs
Loans and securities backed by commercial real estate Ÿ      Collateralized by a single commercial real estate property or a portfolio of properties Ÿ      May include tranches of varying levels of subordination	Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
	Significant inputs are generally determined based on relative value analyses and include:
	Ÿ     Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral and the basis, or price difference, to such prices
	Ÿ     Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)
	Ÿ     A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments
	Ÿ     Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds)
Loans and securities backed by residential real estate Ÿ      Collateralized by portfolios of residential real estate Ÿ      May include tranches of varying levels of subordination	Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
	Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Significant inputs include:
	Ÿ     Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral
	Ÿ     Market yields implied by transactions of similar or related assets
	Ÿ     Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines and related costs
	Ÿ     Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines
Bank loans and bridge loans	Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
	Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:
	Ÿ     Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively)
	Ÿ     Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation
	Ÿ     Duration
Non-U.S. government and agency obligations Corporate debt securities State and municipal obligations Other debt obligations	Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
	Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:
	Ÿ     Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX, LCDX and MCDX (an index that tracks the performance of municipal obligations)
	Ÿ     Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation
	Ÿ     Duration
Equities and convertible debentures (including private equity investments and investments in real estate entities)	Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate:
	Ÿ     Industry multiples (primarily EBITDA multiples) and public comparables
	Ÿ     Transactions in similar instruments
	Ÿ     Discounted cash flow techniques
	Ÿ     Third-party appraisals
	Ÿ     Net asset value per share (NAV)
	The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as compared to projected performance. Significant inputs include:
	Ÿ     Market and transaction multiples
	Ÿ     Discount rates, long-term growth rates, earnings compound annual growth rates and capitalization rates
	Ÿ      For equity instruments with debt-like features: market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration

Goldman Sachs September 2014 Form 10-Q 17

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Significant Unobservable Inputs

The tables below present the ranges of significant unobservable inputs used to value the firm’s level 3 cash instruments. These ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument. Weighted averages in the tables below are calculated by weighting each input by the relative fair value of the respective financial instruments. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when

calculating the fair value of any one cash instrument. For example, the highest multiple presented in the tables below for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.

Level 3 Cash Instruments	Level 3 Assets    as of September 2014    ($ in millions)	Valuation Techniques and Significant Unobservable Inputs	Range of Significant Unobservable Inputs (Weighted Average) as of September 2014
Loans and securities backed by commercial real estate Ÿ   Collateralized by a single commercial real estate property or a portfolio of properties Ÿ    May include tranches of varying levels of subordination	$3,306	Discounted cash flows:
		Ÿ    Yield	2.8% to 21.9% (10.7%)
		Ÿ    Recovery rate	24.6% to 94.5% (70.3%)
		Ÿ    Duration (years)	0.4 to 4.6 (2.2)
		Ÿ    Basis	(8) points to 11 points (1 point)
Loans and securities backed by residential real estate Ÿ    Collateralized by portfolios of residential real estate Ÿ    May include tranches of varying levels of subordination	$2,300	Discounted cash flows:
		Ÿ    Yield	2.5% to 17.5% (7.8%)
		Ÿ    Cumulative loss rate	0.0% to 89.7% (25.5%)
		Ÿ    Duration (years)	1.0 to 10.6 (3.8)
Bank loans and bridge loans	$7,803	Discounted cash flows:
		Ÿ    Yield	1.7% to 24.8% (7.6%)
		Ÿ    Recovery rate	26.6% to 96.4% (59.2%)
		Ÿ    Duration (years)	0.3 to 5.0 (2.3)
Non-U.S. government and agency obligations Corporate debt securities State and municipal obligations Other debt obligations	$4,455	Discounted cash flows:
		Ÿ    Yield	1.0% to 24.0% (9.3%)
		Ÿ    Recovery rate	0.0% to 73.6% (62.7%)
		Ÿ    Duration (years)	0.7 to 12.2 (3.4)
Equities and convertible debentures (including private equity investments and investments in real estate entities)	$16,653 1	Comparable multiples:
		Ÿ    Multiples	0.8x to 19.9x (6.9x)
		Discounted cash flows:
		Ÿ    Discount rate/yield	6.0% to 25.0% (14.5%)
		Ÿ    Long-term growth rate/compound annual growth rate	(3.5)% to 22.0% (7.6%)
		Ÿ   Capitalization rate	5.1% to 12.1% (7.5%)

1. The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

18 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Cash Instruments	Level 3 Assets as of December 2013    ($ in millions)	Valuation Techniques and Significant Unobservable Inputs	Range of Significant Unobservable Inputs (Weighted Average) as of December 2013
Loans and securities backed by commercial real estate Ÿ    Collateralized by a single commercial real estate property or a portfolio of properties Ÿ    May include tranches of varying levels of subordination	$2,692	Discounted cash flows:
		Ÿ    Yield	2.7% to 29.1% (10.1%)
		Ÿ    Recovery rate	26.2% to 88.1% (74.4%)
		Ÿ    Duration (years)	0.6 to 5.7 (2.0)
		Ÿ    Basis	(9) points to 20 points (5 points)
Loans and securities backed by residential real estate Ÿ    Collateralized by portfolios of residential real estate Ÿ    May include tranches of varying levels of subordination	$1,961	Discounted cash flows:
		Ÿ    Yield	2.6% to 25.8% (10.1%)
		Ÿ    Cumulative loss rate	9.8% to 56.6% (24.9%)
		Ÿ    Duration (years)	1.4 to 16.7 (3.6)
Bank loans and bridge loans	$9,324	Discounted cash flows:
		Ÿ    Yield	1.0% to 39.6% (9.3%)
		Ÿ    Recovery rate	40.0% to 85.0% (54.9%)
		Ÿ    Duration (years)	0.5 to 5.3 (2.1)
Non-U.S. government and agency obligations Corporate debt securities State and municipal obligations Other debt obligations	$3,977	Discounted cash flows:
		Ÿ    Yield	1.5% to 40.2% (8.9%)
		Ÿ    Recovery rate	0.0% to 70.0% (61.9%)
		Ÿ    Duration (years)	0.6 to 16.1 (4.2)
Equities and convertible debentures (including private equity investments and investments in real estate entities)	$14,685 1	Comparable multiples:
		Ÿ    Multiples	0.6x to 18.8x (6.9x)
		Discounted cash flows:
		Ÿ    Discount rate/yield	6.0% to 29.1% (14.6%)
		Ÿ    Long-term growth rate/compound annual growth rate	1.0% to 19.0% (8.1%)
		Ÿ   Capitalization rate	4.6% to 11.3% (7.1%)

1. The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples, long-term growth rate or compound annual

growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

Goldman Sachs September 2014 Form 10-Q 19

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value of Cash Instruments by Level

The tables below present, by level within the fair value hierarchy, cash instrument assets and liabilities, at fair value. Cash instrument assets and liabilities are included in

“Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

	Cash Instrument Assets at Fair Value as of September  2014
$ in millions		Level 1	Level 2	Level 3		Total
Commercial paper, certificates of deposit, time deposits and other money market instruments		$           1	$    4,883	$       —		$    4,884
U.S. government and federal agency obligations		19,138	40,777	—		59,915
Non-U.S. government and agency obligations		31,334	7,367	124		38,825
Mortgage and other asset-backed loans and securities 1:
Loans and securities backed by commercial real estate		—	2,520	3,306		5,826
Loans and securities backed by residential real estate		—	8,959	2,300		11,259
Bank loans and bridge loans		—	8,400	7,803		16,203
Corporate debt securities 2		256	17,554	3,589		21,399
State and municipal obligations		—	1,118	131		1,249
Other debt obligations 2		—	2,593	611		3,204
Equities and convertible debentures		75,326	9,991	16,653	3	101,970
Commodities		—	3,963	—		3,963
Total		$126,055	$108,125	$34,517		$268,697
	Cash Instrument Liabilities at Fair Value as of September 2014
$ in millions		Level 1	Level 2	Level 3		Total
U.S. government and federal agency obligations		$  16,749	$         45	$       —		$  16,794
Non-U.S. government and agency obligations		19,938	1,621	—		21,559
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		—	20	1		21
Loans and securities backed by residential real estate		—	1	—		1
Bank loans and bridge loans		—	426	174		600
Corporate debt securities		9	5,294	9		5,312
Other debt obligations		—	1	2		3
Equities and convertible debentures		31,433	170	3		31,606
Commodities		—	1,799	—		1,799
Total		$  68,129	$    9,377	$     189		$  77,695

1. Includes $112 million and $495 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

2. Includes $238 million and $956 million of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3. Includes $14.95 billion of private equity investments, $1.22 billion of investments in real estate entities and $485 million of convertible debentures.

20 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Cash Instrument Assets at Fair Value as of December 2013
$ in millions		Level 1	Level 2	Level 3		Total
Commercial paper, certificates of deposit, time deposits and other money market instruments		$       216	$    8,392	$       —		$    8,608
U.S. government and federal agency obligations		29,582	41,490	—		71,072
Non-U.S. government and agency obligations		29,451	11,453	40		40,944
Mortgage and other asset-backed loans and securities 1:
Loans and securities backed by commercial real estate		—	3,904	2,692		6,596
Loans and securities backed by residential real estate		—	7,064	1,961		9,025
Bank loans and bridge loans		—	8,076	9,324		17,400
Corporate debt securities 2		240	14,299	2,873		17,412
State and municipal obligations		—	1,219	257		1,476
Other debt obligations 2		—	2,322	807		3,129
Equities and convertible debentures		76,945	9,394	14,685	3	101,024
Commodities		—	4,556	—		4,556
Total		$136,434	$112,169	$32,639		$281,242
	Cash Instrument Liabilities at Fair Value as of December 2013
$ in millions		Level 1	Level 2	Level 3		Total
U.S. government and federal agency obligations		$  20,871	$         49	$       —		$  20,920
Non-U.S. government and agency obligations		25,325	1,674	—		26,999
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		—	—	1		1
Loans and securities backed by residential real estate		—	2	—		2
Bank loans and bridge loans		—	641	284		925
Corporate debt securities		10	5,241	2		5,253
State and municipal obligations		—	50	1		51
Other debt obligations		—	3	1		4
Equities and convertible debentures		22,107	468	8		22,583
Commodities		—	966	—		966
Total		$  68,313	$    9,094	$     297		$  77,704

1. Includes $295 million and $411 million of CDOs backed by real estate in level 2 and level 3, respectively.

2. Includes $451 million and $1.62 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

3. Includes $12.82 billion of private equity investments, $1.37 billion of investments in real estate entities and $491 million of convertible debentures.

Transfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the three months ended September 2014, transfers into level 2 from level 1 of cash instruments were $25 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the three months ended September 2014, transfers into level 1 from level 2 of cash instruments were $1 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the three months ended September 2013, transfers into level 2 from level 1 of cash instruments were $31 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the three months ended September 2013, transfers into level 1 from level 2 of cash instruments were $22 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During the nine months ended September 2014, transfers into level 2 from level 1 of cash instruments were $65 million, including $47 million of public equity securities and $18 million of U.S. government and federal agency obligations due to decreased market activity in these instruments. During the nine months ended September 2014, transfers into level 1 from level 2 of cash instruments were $80 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the nine months ended September 2013, transfers into level 2 from level 1 of cash instruments were $24 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the nine months ended September 2013, transfers into level 1 from level 2 of cash instruments were $71 million, reflecting transfers of public equity securities, primarily due to increased market activity in these instruments.

See level 3 rollforward below for information about transfers between level 2 and level 3.

Goldman Sachs September 2014 Form 10-Q 21

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Rollforward

If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3.

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash

instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the period. Purchases in the tables below include both originations and secondary market purchases.

	Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2014
$ in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Non-U.S. government and agency obligations		$        53	$    1		$   —		$      87		$       (6	)	$      (11	)	$      —	$       —		$     124
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		2,620	56		(3	)	122		(62	)	(179	)	877	(125	)	3,306
Loans and securities backed by residential real estate		2,039	37		37		373		(167	)	(125	)	155	(49	)	2,300
Bank loans and bridge loans		8,947	134		(78	)	1,060		(355	)	(2,270	)	984	(619	)	7,803
Corporate debt securities		2,330	83		(40	)	1,767		(491	)	(518	)	697	(239	)	3,589
State and municipal obligations		169	2		(1	)	3		(35	)	–		27	(34	)	131
Other debt obligations		629	5		2		102		(12	)	(68	)	44	(91	)	611
Equities and convertible debentures		16,259	30		586		688		(283	)	(391	)	893	(1,129	)	16,653
Total		$33,046	$348	1	$503	1	$4,202		$(1,411	)	$(3,562	)	$3,677	$(2,286	)	$34,517
	Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2014
$ in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Total		$     197	$    6		$  20		$    (76	)	$      31		$        (7	)	$     29	$     (11	)	$     189

1. The aggregate amounts include gains of approximately $27 million, $527 million and $297 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $483 million (reflecting a $503 million gain on cash instrument assets and a $20 million loss on cash instrument liabilities) for the three months ended September 2014 reflected gains on private equity investments principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during the three months ended September 2014 primarily reflected transfers of certain bank loans and bridge loans, private equity investments, loans and securities back by commercial real estate and

corporate debt securities from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the three months ended September 2014 primarily reflected transfers of certain private equity investments and bank loans and bridge loans to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

22 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2014
$ in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Non-U.S. government and agency obligations		$       40	$       4		$       2		$       93		$     (19	)	$       (4	)	$       8	$       —		$     124
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		2,692	112		139		1,332		(373	)	(559	)	178	(215	)	3,306
Loans and securities backed by residential real estate		1,961	145		148		648		(289	)	(329	)	232	(216	)	2,300
Bank loans and bridge loans		9,324	523		18		3,023		(1,155	)	(3,846	)	383	(467	)	7,803
Corporate debt securities		2,873	233		34		2,247		(934	)	(833	)	391	(422	)	3,589
State and municipal obligations		257	3		3		31		(112	)	(1	)	—	(50	)	131
Other debt obligations		807	45		62		99		(187	)	(106	)	18	(127	)	611
Equities and convertible debentures		14,685	188		1,929		2,928		(1,336	)	(966	)	1,186	(1,961	)	16,653
Total		$32,639	$1,253	1	$2,335	1	$10,401		$(4,405	)	$(6,644	)	$2,396	$(3,458	)	$34,517
	Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2014
$ in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Total		$     297	$      (2	)	$    (47	)	$    (171	)	$      89		$      27		$     19	$     (23	)	$     189

1. The aggregate amounts include gains of approximately $464 million, $2.27 billion and $853 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $2.38 billion (reflecting a $2.34 billion gain on cash instrument assets and a $47 million gain on cash instrument liabilities) for the nine months ended September 2014 primarily consisted of gains on private equity investments principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during the nine months ended September 2014 primarily reflected transfers of certain private equity investments, corporate debt securities and bank loans and bridge loans from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the nine months ended September 2014 primarily reflected transfers of certain private equity investments, bank loans and bridge loans and corporate debt securities to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

Goldman Sachs September 2014 Form 10-Q 23

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2013
$ in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Non-U.S. government and agency obligations		$       90	$   —		$    3		$       2		$     (27	)	$       —		$     11	$     (24	)	$       55
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		2,969	40		66		320		(338	)	(363	)	77	(87	)	2,684
Loans and securities backed by residential real estate		1,738	17		37		207		(84	)	(114	)	61	(92	)	1,770
Bank loans and bridge loans		9,997	118		105		1,317		(580	)	(1,446	)	706	(742	)	9,475
Corporate debt securities		2,492	80		61		190		(357	)	(63	)	137	(227	)	2,313
State and municipal obligations		322	1		(2	)	28		(59	)	(1	)	4	(66	)	227
Other debt obligations		876	13		15		116		(26	)	(56	)	48	(214	)	772
Equities and convertible debentures		15,417	20		697		306		(115	)	(378	)	496	(263	)	16,180
Total		$33,901	$289	1	$982	1	$2,486		$(1,586	)	$(2,421	)	$1,540	$(1,715	)	$33,476
	Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2013
$ in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Total		$     385	$   (4	)	$  17		$  (101	)	$      49		$        3		$     32	$     (14	)	$     367

1. The aggregate amounts include gains of approximately $149 million, $891 million and $231 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $965 million (reflecting $982 million of gains on cash instrument assets and $17 million of losses on cash instrument liabilities) for the three months ended September 2013 primarily consisted of gains on private equity investments, primarily driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2, due to a lack of market transactions in these instruments.

Transfers out of level 3 during the three months ended September 2013 primarily reflected transfers to level 2 of certain bank loans and bridge loans, private equity investments and other debt obligations, as a result of market transactions in these or similar instruments, and corporate debt obligations, principally due to increased transparency as a result of market transactions in these instruments and certain unobservable inputs not being significant to the valuation of these instruments.

24 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2013
$ in millions		Balance, beginning of period	Net realized gains/ (losses)		Net unrealized gains/(losses) relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Non-U.S. government and agency obligations		$       26	$    5		$       9		$     23		$     (14	)	$       (2	)	$     11	$       (3	)	$       55
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		3,389	86		197		549		(627	)	(965	)	197	(142	)	2,684
Loans and securities backed by residential real estate		1,619	37		99		633		(380	)	(236	)	78	(80	)	1,770
Bank loans and bridge loans		11,235	356		278		3,494		(2,042	)	(3,408	)	1,052	(1,490	)	9,475
Corporate debt securities		2,821	255		393		542		(1,392	)	(420	)	353	(239	)	2,313
State and municipal obligations		619	3		1		99		(461	)	(2	)	6	(38	)	227
Other debt obligations		1,185	35		16		563		(410	)	(60	)	17	(574	)	772
Equities and convertible debentures		14,855	154		1,635		1,640		(650	)	(1,396	)	1,015	(1,073	)	16,180
Total		$35,749	$931	1	$2,628	1	$7,543		$(5,976	)	$(6,489	)	$2,729	$(3,639	)	$33,476
	Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2013
$ in millions		Balance, beginning of period	Net realized (gains)/ losses		Net unrealized (gains)/losses relating to instruments still held at period-end		Purchases		Sales		Settlements		Transfers into level 3	Transfers out of level 3		Balance, end of period
Total		$     642	$    7		$      —		$  (368	)	$    187		$      13		$     46	$   (160	)	$     367

1. The aggregate amounts include gains of approximately $664 million, $2.31 billion and $585 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $2.63 billion for the nine months ended September 2013 primarily consisted of gains on private equity investments, primarily driven by strong corporate performance and company-specific events, corporate debt securities, primarily due to tighter credit spreads, and bank loans and bridge loans, primarily due to company-specific events.

Transfers into level 3 during the nine months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2, principally due to a lack of market transactions in these instruments.

Transfers out of level 3 during the nine months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans, private equity investments and other debt obligations to level 2, principally due to increased transparency of market prices as a result of market transactions in these instruments and transfers related to the firm’s European insurance business of certain level 3 “Bank loans and bridge loans” within cash instruments to level 3 “Other assets” within other financial assets at fair value, as this business was classified as held for sale during the period.

Goldman Sachs September 2014 Form 10-Q 25

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Investments in Funds That Are Calculated Using Net Asset Value Per Share

Cash instruments at fair value include investments in funds that are calculated based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.

The firm’s investments in funds that are calculated using NAV primarily consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. The private equity, credit and real estate funds are primarily closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed.

The firm also invests in hedge funds, primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage. The firm has submitted redemption requests for approximately $375 million of its interests in hedge funds to be redeemed. Excluding the interests related to these redemption requests, the remainder of the firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed.

Many of the funds described above are “covered funds” as defined by the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which has a conformance period that ends in July 2015 subject to possible extensions through July 2017.

The firm continues to manage its existing funds, taking into account the transition periods under the Volcker Rule.

In order to be compliant with the Volcker Rule, the firm will be required to reduce most of its interests in the funds in the table below by the prescribed compliance date. To the extent that the underlying investments of particular funds are not sold, the firm may be required to sell its investments in such funds. If that occurs, the firm may receive a value for its investments that is less than the then carrying value, as there could be a limited secondary market for these investments and the firm may be unable to sell them in orderly transactions.

Since March 2012, the firm has redeemed approximately $2.55 billion of its interests in hedge funds, including approximately $285 million and $345 million during the three and nine months ended September 2014, respectively.

The tables below present the fair value of the firm’s investments in, and unfunded commitments to, funds that are calculated using NAV.

	As of September 2014
$ in millions		Fair Value of Investments	Unfunded Commitments
Private equity funds		$  6,957	$2,337
Credit funds 1		1,426	301
Hedge funds		1,330	—
Real estate funds		1,667	344
Total		$11,380	$2,982
	As of December 2013
$ in millions		Fair Value of Investments	Unfunded Commitments
Private equity funds		$  7,446	$2,575
Credit funds 1		3,624	2,515
Hedge funds		1,394	—
Real estate funds		1,908	471
Total		$14,372	$5,561

1. The decreases from December 2013 to September 2014 primarily reflect both cash and in-kind distributions received and the related cancellations of the firm’s commitments to certain credit funds.

26 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).

Market-Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, to manage foreign currency exposure on the net investment in certain non-U.S. operations, and to manage the exposure to the variability in cash flows associated with the forecasted sales of certain energy commodities by one of the firm’s consolidated investments.

The firm enters into various types of derivatives, including:

Ÿ Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

Ÿ Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

Ÿ Options. Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively. Substantially all gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions.”

The tables below present the fair value of derivatives on a net-by-counterparty basis.

	As of September 2014
$ in millions		Derivative Assets	Derivative Liabilities
Exchange-traded		$  2,193	$  2,153
OTC		54,436	52,173
Total		$56,629	$54,326
	As of December 2013
$ in millions		Derivative Assets	Derivative Liabilities
Exchange-traded		$  4,277	$  6,366
OTC		53,602	43,356
Total		$57,879	$49,722

Goldman Sachs September 2014 Form 10-Q 27

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below presents the fair value and the notional amount of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure. The table below also presents the amounts of counterparty and cash collateral netting in the condensed consolidated statements of financial condition, as well as cash and securities collateral posted and received under enforceable credit support

agreements that do not meet the criteria for netting under U.S. GAAP. Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted in the table below. Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

	As of September 2014						As of December 2013
$ in millions		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount
Derivatives not accounted for as hedges
Interest rates		$ 635,391		$ 583,912		$47,804,487		$ 641,186		$ 587,110		$44,110,483
Exchange-traded		212		235		3,959,258		157		271		2,366,448
OTC-cleared		250,118		229,578		28,889,374		266,230		252,596		24,888,301
Bilateral OTC		385,061		354,099		14,955,855		374,799		334,243		16,855,734
Credit		51,581		48,430		2,682,973		60,751		56,340		2,946,376
OTC-cleared		5,659		5,599		414,987		3,943		4,482		348,848
Bilateral OTC		45,922		42,831		2,267,986		56,808		51,858		2,597,528
Currencies		101,994		96,995		5,521,754		70,757		63,659		4,311,971
Exchange-traded		150		123		26,604		98		122		23,908
OTC-cleared		134		116		14,379		88		97		11,319
Bilateral OTC		101,710		96,756		5,480,771		70,571		63,440		4,276,744
Commodities		15,749		15,801		716,381		18,007		18,228		701,101
Exchange-traded		3,973		3,831		363,782		4,323		3,661		346,057
OTC-cleared		231		265		3,143		11		12		135
Bilateral OTC		11,545		11,705		349,456		13,673		14,555		354,909
Equities		53,960		54,254		1,650,751		56,719		55,472		1,406,499
Exchange-traded		10,397		10,503		625,274		10,544		13,157		534,840
Bilateral OTC		43,563		43,751		1,025,477		46,175		42,315		871,659
Subtotal		858,675		799,392		58,376,346		847,420		780,809		53,476,430
Derivatives accounted for as hedges
Interest rates		12,239		471		122,023		11,403		429		132,879
OTC-cleared		3,556		214		36,237		1,327		27		10,637
Bilateral OTC		8,683		257		85,786		10,076		402		122,242
Currencies		129		20		9,114		74		56		9,296
OTC-cleared		8		3		1,385		1		10		869
Bilateral OTC		121		17		7,729		73		46		8,427
Commodities		45		—		147		36		—		335
Exchange-traded		—		—		—		—		—		23
Bilateral OTC		45		—		147		36		—		312
Subtotal		12,413		491		131,284		11,513		485		142,510
Gross fair value/notional amount of derivatives		$ 871,088	1	$ 799,883	1	$58,507,630		$ 858,933	1	$ 781,294	1	$53,618,940
Amounts that have been offset in the condensed consolidated statements of financial condition
Counterparty netting		(715,548	)	(715,548	)			(707,411	)	(707,411	)
Exchange-traded		(12,539	)	(12,539	)			(10,845	)	(10,845	)
OTC-cleared		(234,307	)	(234,307	)			(254,756	)	(254,756	)
Bilateral OTC		(468,702	)	(468,702	)			(441,810	)	(441,810	)
Cash collateral netting		(98,911	)	(30,009	)			(93,643	)	(24,161	)
OTC-cleared		(25,255	)	(1,393	)			(16,353	)	(2,515	)
Bilateral OTC		(73,656	)	(28,616	)			(77,290	)	(21,646	)
Fair value included in financial instruments owned/ financial instruments sold, but not yet purchased		$   56,629		$   54,326				$   57,879		$   49,722
Amounts that have not been offset in the condensed consolidated statements of financial condition
Cash collateral received/posted		(1,015	)	(3,168	)			(636	)	(2,806	)
Securities collateral received/posted		(12,716	)	(12,412	)			(13,225	)	(10,521	)
Total		$   42,898		$   38,746				$   44,018		$   36,395

1. Includes derivative assets and derivative liabilities of $27.33 billion and $27.57 billion, respectively, as of September 2014, and derivative assets and derivative liabilities of $23.18 billion and $23.46 billion, respectively, as of December 2013, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.

28 Goldman Sachs September 2014 Form 10-Q

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Valuation Techniques for Derivatives

The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type.

Ÿ Interest Rate. In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the prices and other inputs are generally observable.

Ÿ Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Cr