We're looking at the asset side of Goldman Sachs' balance sheet here, and we're going to take a look at the receivable lines in detail. We've got three line items here, receivables due from brokers, dealers, and clearing organizations. And that is largely related to the activity, the market making activity in the financial markets. And that is similar as the other side effectively of the parables line on the liability side. Let's take a look at the other two items in some detail. Here what we've got is a breakdown of the different receivables lines on the balance sheet. Here we can see these three light items. We've got the receivables from brokers, dealers, receivables from customers, and counterparties and loans receivable. And along the top we've got the different kind of product groups here. So we've got secured client financing which is broadly some type of collateralized lending. Probably things like prime brokerage where Goldman Sachs is helping to finance hedge funds and people active in the financial markets. Institutional client services that will largely be market making and then investing in lending is the classic lending product where Goldman Sachs is making loans to people. Taking a look at the accounting for this, the receivables from customers and counterparties, you can see it's talking about collateralized transactions and it also goes on to say that these are substantially all recorded at amortized cost. So this means these are not marked to market, they're not at fair value, but they're typically kept at cost. There may be some small elements of fair value but generally these items are at amortized cost and that will also be true of the receivables from brokers, dealers and clearing organizations.

Let's take a look at loans receivable in a bit of detail because this is where amortized cost really kind of comes in into its own in terms of the detail that you need to understand for it. So loans receivable, again, it's amortized costs net of allowance for loan losses. We're not going to cover allowance for loan losses but that is an allowance for if the loan doesn't get paid. We can also see the breakdown of where these loans are coming from. We've got some corporate loans here. We've got some private wealth loans and then we've got some real estate loans and some other items here. And you can see here we've got the amount that's been advanced here. And then just underneath it we've got the allowance for loan losses. That's the kind of provision in case those loans don't don't get paid. Let's take a look at the amortized cost accounting. And what we've got here is we've got a loan that's being made of 100 million. We've got an arrangement fee of 2 million and we've got a cash interest rate of 5% and then an effective interest of 5.6%.

The effective interest is the internal rate return of this loan incorporating the cost of the arrangement fees. So in other words, someone taking out this loan is effectively facing a cost of 5.6% because of the arrangement fees. So what happens to the balance sheet of Goldman Sachs here? Well, firstly, we will see the loan being put on the balance sheet at 98, so that is the amount net of the arrangement fees, the 100 minus two. So cash will go down because that's how much is being advanced to the person taking out the loan. And the loan balance will go up by 98. Then what happens during the year? Well, in this case, the first item is the accrued interest. So that interest of 5.5 we can calculate by taking the 5.6%. This is 5.6% times the balance of the loan, which in this case is 98 and that will give us 5.5 million and that's the true cost of the loan, the economic cost. Now it's accrued interest because that's not necessarily paying in cash 'cause you'll notice the amount actually paid in cash interest is five. And that five is calculated by taking the 100 the par value of the loan times the cash interest rate of 5% because that's how much the borrower is actually paying. So this means Golden Sachs will receive cash of five. So that will reduce the loan balance. So the loan started at 98, we add the accrued interest of 5.5, we reduce the cash interest of five, which means the balance of the loan increases slightly to 98.5. Now over time you can see that the loan increases steadily until it actually reaches 100 million at the point at which it's paid off. So this means there's no gain or loss at the end of the loan's life. What happens is because we use the effective interest rate to calculate interest, what happens is the balance of the loan gradually rises up to 100 which takes into account the arrangement fees and amortizes them over the life of the loan. Hence the term amortized cost. One last thing to mention, is that the market value is completely ignored in this method of accounting. So we don't include any relation to the market value. The amortized cost methodology just keeps the balance of the loan constant except for the amortization of any arrangement fees.