GE 2012 Annual Report Download - page 124

122 GE 2012 ANNUAL REPORT
notes to consolidated financial statements
LOAN COMMITMENTS
Notional amount
December 31 (In millions) 2012 2011
Ordinary course of business lending
commitments (a) $ 3,708 $ 3,756
Unused revolving credit lines (b)
Commercial (c) 17,929 18,757
Consumer—principally credit cards 271,387 257,646
(a) Excluded investment commitments of $1,276 million and $2,064 million as of
December 31, 2012 and 2011, respectively.
(b) Excluded inventory financing arrangements, which may be withdrawn at our
option, of $12,813 million and $12,354 million as of December 31, 2012 and 2011,
respectively.
(c) Included commitments of $12,923 million and $14,057 million as of December 31,
2012 and 2011, respectively, associated with secured financing arrangements
that could have increased to a maximum of $15,731 million and $17,344 million at
December 31, 2012 and 2011, respectively, based on asset volume under the
arrangement.
DERIVATIVES AND HEDGING
As a matter of policy, we use derivatives for risk management
purposes, and we do not use derivatives for speculative purposes.
A key risk management objective for our financial services busi-
nesses is to mitigate interest rate and currency risk by seeking
to ensure that the characteristics of the debt match the assets
they are funding. If the form (fixed versus floating) and currency
denomination of the debt we issue do not match the related assets,
we typically execute derivatives to adjust the nature and tenor of
funding to meet this objective. The determination of whether we
enter into a derivative transaction or issue debt directly to achieve
this objective depends on a number of factors, including market
related factors that affect the type of debt we can issue.
The notional amounts of derivative contracts represent the
basis upon which interest and other payments are calculated and
are reported gross, except for offsetting foreign currency forward
contracts that are executed in order to manage our currency
risk of net investment in foreign subsidiaries. Of the outstand-
ing notional amount of $325,000 million, approximately 87% or
$282,000 million, is associated with reducing or eliminating the
interest rate, currency or market risk between financial assets
and liabilities in our financial services businesses. The remaining
derivative activities primarily relate to hedging against adverse
changes in currency exchange rates and commodity prices
related to anticipated sales and purchases and contracts con-
taining certain clauses which meet the accounting definition of
a derivative. The instruments used in these activities are desig-
nated as hedges when practicable. When we are not able to apply
hedge accounting, or when the derivative and the hedged item
are both recorded in earnings concurrently, the derivatives are
deemed economic hedges and hedge accounting is not applied.
This most frequently occurs when we hedge a recognized foreign
currency transaction (e.g., a receivable or payable) with a deriva-
tive. Since the effects of changes in exchange rates are reflected
concurrently in earnings for both the derivative and the transac-
tion, the economic hedge does not require hedge accounting.
The following table provides information about the fair value
of our derivatives by contract type, separating those accounted
for as hedges and those that are not.
2012 2011
Fair value Fair value
December 31 (In millions) Assets Liabilities Assets Liabilities
DERIVATIVES ACCOUNTED
FOR AS HEDGES
Interest rate contracts $ 8,443 $ 719 $ 9,446 $ 1,049
Currency exchange
contracts 890 1,777 3,750 2,325
Other contracts 1–111
9,334 2,496 13,197 3,385
DERIVATIVES NOT
ACCOUNTED FOR
AS HEDGES
Interest rate contracts 452 195 319 241
Currency exchange
contracts 1,797 691 1,748 1,274
Other contracts 283 72 381 137
2,532 958 2,448 1,652
NETTING ADJUSTMENTS
(a) (2,801) (2,786) (3,294) (3,281)
CASH COLLATERAL (b) (c) (5,125) (391) (2,310) (1,027)
Total $ 3,940 $ 277 $10,041 $ 729
Derivatives are classified in the captions “All other assets” and “All other liabilities”
in our financial statements.
(a) The netting of derivative receivables and payables is permitted when a legally
enforceable master netting agreement exists. Amounts included fair value
adjustments related to our own and counterparty non-performance risk. At
December 31, 2012 and 2011, the cumulative adjustment for non-performance
risk was a gain (loss) of $(15) million and $(13) million, respectively.
(b) Excludes excess cash collateral received of $42 million and $579 million at
December 31, 2012 and 2011, respectively. Excludes excess cash collateral
posted of $10 million at December 31, 2012.
(c) Excludes securities pledged to us as collateral of $5,586 million and
$10,574 million at December 31, 2012 and 2011, respectively, which includes
excess securities collateral of $359 million at December 31, 2012.
Fair Value Hedges
We use interest rate and currency exchange derivatives to hedge
the fair value effects of interest rate and currency exchange rate
changes on local and non-functional currency denominated
fixed-rate debt. For relationships designated as fair value hedges,
changes in fair value of the derivatives are recorded in earnings
within interest and other financial charges, along with offset-
ting adjustments to the carrying amount of the hedged debt.
The following table provides information about the earnings
effects of our fair value hedging relationships for the years ended
December 31, 2012 and 2011.
2012 2011
(In millions)
Gain (loss)
on hedging
derivatives
Gain (loss)
on hedged
items
Gain (loss)
on hedging
derivatives
Gain (loss)
on hedged
items
Interest rate contracts $708 $(1,041) $5,888 $(6,322)
Currency exchange
contracts (169) 199 119 (144)
Fair value hedges resulted in $(303) million and $(459) million of ineffectiveness in
2012 and 2011, respectively. In both 2012 and 2011, there were insignificant amounts
excluded from the assessment of effectiveness.