GE 2012 Annual Report Download - page 125

GE 2012 ANNUAL REPORT 123
notes to consolidated financial statements
Cash Flow Hedges
We use interest rate, currency exchange and commodity deriva-
tives to reduce the variability of expected future cash flows
associated with variable rate borrowings and commercial
purchase and sale transactions, including commodities. For
derivatives that are designated in a cash flow hedging relation-
ship, the effective portion of the change in fair value of the
derivative is reported as a component of AOCI and reclassified
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 financial charges, when reclassified
out of AOCI, for the years ended December 31, 2012 and 2011.
Gain (loss)
recognized in AOCI
Gain (loss) reclassified
from AOCI into earnings
(In millions) 2012 2011 2012 2011
Interest rate contracts $(158) $(302) $(499) $ (820)
Currency exchange
contracts 317 (292) (6) (370)
Commodity contracts 6(13) (5) 10
Total $ 165 $(607) $(510) $(1,180)
The total pre-tax amount in AOCI related to cash flow hedges of forecasted
transactions was a $799 million loss at December 31, 2012. We expect to transfer
$391 million to earnings as an expense in the next 12 months contemporaneously
with the earnings effects of the related forecasted transactions. In 2012, 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, 2012 and 2011, the maximum term of derivative
instruments that hedge forecasted transactions was 20 years and 21 years,
respectively.
For cash flow hedges, the amount of ineffectiveness in the
hedging relationship and amount of the changes in fair value
of the derivatives that are not included in the measurement of
ineffectiveness are both reflected in earnings each reporting
period. These amounts are primarily reported in GECC revenues
from services and totaled $5 million and $29 million for the years
ended December 31, 2012 and 2011, respectively.
Net Investment Hedges in Foreign Operations
We use currency exchange derivatives to protect our net
investments 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 reflects 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, 2012 and
2011, as well as the gain (loss) recorded in GECC revenues from
services when reclassified out of AOCI.
Gain (loss)
recognized in CTA
Gain (loss)
reclassified from CTA
(In millions) 2012 2011 2012 2011
Currency exchange
contracts $(2,905) $1,232 $27 $(716)
The amounts related to the change in the fair value of the forward
points that are excluded from the measure of effectiveness
were $(874) million and $(1,345) million for the years ended
December 31, 2012 and 2011, respectively, and are recorded in
interest and other financial 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, commod-
ity prices and other risks. Gains or losses related to the derivative
are typically recorded in GECC 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, 2012 on derivatives not designated as
hedges were $(513) million composed of amounts related to inter-
est rate contracts of $(297) million, currency exchange contracts
of $(342) million, partially offset by other derivatives of $126 mil-
lion. These losses more than offset the earnings effects from the
underlying items that were economically hedged. Losses for the
year ended December 31, 2011 on derivatives not designated as
hedges were $(876) million composed of amounts related to inter-
est 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 underly-
ing items that were economically hedged.
Counterparty Credit Risk
Fair values of our derivatives can change significantly from
period-to-period based on, among other factors, market move-
ments 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 counterparty basis. Where we have agreed to netting
of derivative exposures with a counterparty, we net our expo-
sures with that counterparty and apply the value of collateral
posted to us to determine the exposure. We actively monitor
these net exposures against defined limits and take appropriate
actions in response, including requiring additional collateral.
As discussed above, we have provisions in certain of our mas-
ter agreements that require counterparties to post collateral
(typically, cash or U.S. Treasury securities) when our receivable
due from the counterparty, measured at current market value,
exceeds a specified limit. At December 31, 2012, our exposure
to counterparties, including interest due, net of collateral we
hold, was $559 million. The fair value of such collateral was