GE 2015 Annual Report Download - page 219

FINANCIAL STATEMENTS FINANCIAL INSTRUMENTS
GE 2015 FORM 10-K 191
FORMS OF HEDGING
In this section we explain the hedging methods we use and their effects on our financial statements.
Cash flow hedges ± We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on
purchase and sale contracts in our industrial businesses and to convert foreign currency debt that we have issued in our financial
services business back to our functional currency. Accordingly, the vast majority of our derivative activity in this category consists of
currency exchange contracts. As a result of acquisitions in our industrial businesses, we expect to significantly expand our foreign
currency hedging activity related to long-term contracts. We also use commodity derivatives to reduce or eliminate price risk on raw
materials purchased for use in manufacturing.
Under hedge accounting, the derivative carrying amount is measured at fair value each period and any resulting gain or loss is
recorded in a separate component of VKDUHRZQHUV¶ equity. Differences between the derivative and the hedged item may cause changes
in their fair values to not offset completely, which is referred to as ineffectiveness. When the hedged transaction occurs, these amounts
are released from VKDUHRZQHUV¶ equity, in order that the transaction will be reflected in earnings at the rate locked in by the derivative.
The effect of the hedge is reported in the same financial statement line item as the earnings effects of the hedged transaction. The table
below summarizes how the derivative is reflected in the balance sheet and in earnings under hedge accounting. The effect of the
hedged forecasted transaction is not presented in this table but offsets the earnings effect of the derivative.
FINANCIAL STATEMENT EFFECTS - CASH FLOW HEDGES
(In millions) 2015 2014
Balance sheet chan
g
es  
Fair value of derivatives increase (decrease) $ (911) $ (546)
Shareowners' equity (increase) decrease 913 546
Earnings (loss) related to ineffectiveness 2 1
Earnings (loss) effect of derivatives(a) (918) (878)
(
a
)
Offsets earnin
g
s effect of the hed
g
ed forecasted transaction
The following table explains the effect of changes in market rates on the fair value of derivatives we use most commonly in cash flow
hedging arrangements.
Interest rate forwards/swaps Interest rate increases Interest rate decreases
Pay fixed rate/receive floating rate Fair value increases Fair value decreases
Currency forwards/swaps U.S. dollar strengthens U.S. dollar weakens
Pay U.S. dollars/receive foreign currency Fair value decreases Fair value increases
Commodity derivatives Price increases Price decreases
Receive commodity/ pay fixed price Fair value increases Fair value decreases
Fair value hedges ± These derivatives are used to hedge the effects of interest rate and currency exchange rate changes on debt that
we have issued. We have issued mostly fixed rate debt that is used to fund both fixed and floating rate assets. In instances where fixed
rate debt is funding floating rate assets, we have an exposure to changes in interest rates. We enter into interest rate swaps that
receive a fixed rate and pay a floating rate of interest to align with that portion of our debt which funds floating rate assets. These swaps
typically match the maturity of the associated debt being hedged.
Under hedge accounting, the derivative is measured at fair value and the carrying amount of the hedged debt is adjusted for the change
in value related to the exposure being hedged, with both adjustments offset to earnings as interest expense. For example, the earnings
effect of an increase in the fair value of the derivative will be largely offset by the earnings effect of an increase in the carrying amount
of the hedged debt. Differences between the terms of the derivative and the hedged debt may cause changes in their fair values to not
offset completely, which is referred to as ineffectiveness. The table below summarizes how the derivative and the hedged debt are
reflected in the balance sheet and in earnings under hedge accounting. The effect on interest expense of changing from the fixed rate
on the debt to the floating rate on the swap is not shown in this table.
GE 2015 FORM 10-K 191