GE 2011 Annual Report Download - page 122

120 GE 2011 ANNUAL REPORT
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Cash Flow Hedges
We use interest rate, currency exchange and commodity derivatives
to reduce the variability of expected future cash fl ows associated
with variable rate borrowings and commercial purchase and sale
transactions, including commodities. For derivatives that are desig-
nated in a cash fl ow hedging relationship, the effective portion of the
change in fair value of the derivative is reported as a component of
AOCI and reclassifi ed into earnings contemporaneously and in the
same caption with the earnings effects of the hedged transaction.
The following table provides information about the amounts
recorded in AOCI, as well as the gain (loss) recorded in earnings,
primarily in interest and other fi nancial charges, when reclassifi ed
out of AOCI, for the years ended December 31, 2011 and 2010.
Gain (loss)
recognized in AOCI
Gain (loss) reclassified
from AOCI into earnings
(In millions) 2011 2010 2011 2010
Interest rate contracts $(302) $ (571) $ (820) $(1,356)
Currency exchange
contracts (292) (550) (370) (445)
Commodity contracts (13) 10 10 2
Total $(607) $(1,111) $(1,180) $(1,799)
The total pre-tax amount in AOCI related to cash flow hedges of forecasted
transactions was a $1,400 million loss at December 31, 2011. We expect to transfer
$693 million to earnings as an expense in the next 12 months contemporaneously
with the earnings effects of the related forecasted transactions. In 2011, we
recognized insignificant gains and losses related to hedged forecasted transactions
and firm commitments that did not occur by the end of the originally specified
period. At December 31, 2011 and 2010, the maximum term of derivative instruments
that hedge forecasted transactions was 21 years and 22 years, respectively.
For cash fl ow hedges, the amount of ineffectiveness in the hedging
relationship and amount of the changes in fair value of the deriva-
tives that are not included in the measurement of ineffectiveness
are both refl ected in earnings each reporting period. These amounts
are primarily reported in GECS revenues from services and totaled
$29 million and $19 million for the years ended December 31, 2011
and 2010, respectively.
Net Investment Hedges in Foreign Operations
We use currency exchange derivatives to protect our net invest-
ments in global operations conducted in non-U.S. dollar
currencies. For derivatives that are designated as hedges of net
investment in a foreign operation, we assess effectiveness based
on changes in spot currency exchange rates. Changes in spot
rates on the derivative are recorded as a component of AOCI until
such time as the foreign entity is substantially liquidated or sold.
The change in fair value of the forward points, which refl ects the
interest rate differential between the two countries on the deriva-
tive, is excluded from the effectiveness assessment.
The following table provides information about the amounts
recorded in AOCI for the years ended December 31, 2011 and
2010, as well as the gain (loss) recorded in GECS revenues from
services when reclassifi ed out of AOCI.
Gain (loss)
recognized in CTA
Gain (loss)
reclassified from CTA
(In millions) 2011 2010 2011 2010
Currency exchange contracts $1,232 $(2,023) $(716) $56
The amounts related to the change in the fair value of the forward
points that are excluded from the measure of effectiveness were
$(1,345) million and $(906) million for the years ended December 31,
2011 and 2010, respectively, and are recorded in interest and other
fi nancial charges.
Free-Standing Derivatives
Changes in the fair value of derivatives that are not designated
as hedges are recorded in earnings each period. As discussed
above, these derivatives are typically entered into as economic
hedges of changes in interest rates, currency exchange rates,
commodity prices and other risks. Gains or losses related to the
derivative are typically recorded in GECS revenues from services
or other income, based on our accounting policy. In general, the
earnings effects of the item that represent the economic risk
exposure are recorded in the same caption as the derivative.
Losses for the year ended December 31, 2011 on derivatives not
designated as hedges were $(876) million composed of amounts
related to interest rate contracts of $(5) million, currency
exchange contracts of $(817) million, and other derivatives of
$(54) million. These losses were more than offset by the earnings
effects from the underlying items that were economically
hedged. Losses for the year ended December 31, 2010 on deriva-
tives not designated as hedges, without considering the offsetting
earnings effects from the item representing the economic risk
exposure, were $(302) million composed of amounts related to
interest rate contracts of $185 million, currency exchange contracts
of $(666) million, and other derivatives of $179 million.
Counterparty Credit Risk
Fair values of our derivatives can change signifi cantly from period
to period based on, among other factors, market movements and
changes in our positions. We manage counterparty credit risk (the
risk that counterparties will default and not make payments to us
according to the terms of our agreements) on an individual coun-
terparty basis. Where we have agreed to netting of derivative
exposures with a counterparty, we net our exposures with that
counterparty and apply the value of collateral posted to us to
determine the exposure. We actively monitor these net exposures
against defi ned limits and take appropriate actions in response,
including requiring additional collateral.