GE 2015 Annual Report Download - page 221

FINANCIAL STATEMENTS FINANCIAL INSTRUMENTS
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Economic Hedges - These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply
hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. Economic
hedges are used when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the
derivative, making hedge accounting unnecessary. For example, in our Industrial businesses we record the effects of spot exchange
rate changes on our foreign currency payables and receivables in earnings each period along with the fair value changes on the foreign
currency forward contracts used as economic hedges. In these cases, the earnings effects of the derivative and hedged item largely
offset. We also use economic hedges when we have exposures to currency exchange risk for which we are unable to meet the
requirements for hedge accounting. For example, we use currency forwards as an economic hedge of forecasted foreign currency cash
flows under long-term contracts. In this case, the forecast period is so long that it is difficult to meet the hedge accounting requirement
that the occurrence of the hedged transactions is probable. For these types of economic hedges, changes in the fair value of the
derivative are recorded in earnings currently but changes in the value of the forecasted foreign currency cash flows are only recognized
in earnings when they occur. As a result, even though the derivative is an effective economic hedge, there is a net effect on earnings in
each period due to differences in the timing of earnings recognition between the derivative and the hedged item.
The table below provides information about the earnings effects of all derivatives that serve as economic hedges. These derivatives are
marked to fair value through earnings each period. For our financial services business, these gains and losses are reported in ³*(
Capital revenues from VHUYLFHV´ For our industrial businesses, the effects are reported in ³2WKHU LQFRPH´ or ³2WKHU costs and
H[SHQVHV´ The offsetting earnings effects associated with hedged assets and liabilities are also displayed in the table below. In
general, the earnings effects of the hedged item are recorded in the same financial statement line as the derivative. The earnings effect
of economic hedges, after considering offsets related to earnings effects of hedged assets and liabilities, is substantially offset by
changes in the fair value of forecasted transactions that have not yet affected earnings.
FINANCIAL STATEMENT EFFECTS - ECONOMIC HEDGES
(In millions) 2015 2014
Balance sheet changes  
Change in fair value of economic hedge increase (decrease) $ (2,720) $ (2,198)
Change in carrying amount of item being hedged increase (decrease) 2,543 2,083
Earnings (loss) effect of economic hedges(a) (177) (116)
(a) Offset by the future earnings effects of economically hedged item.
The table below explains the effects of market rate changes on the fair value of derivatives we use most commonly as economic
hedges.
Interest rate forwards/swaps interest rate Interest rate increases Interest rate decreases
Pay floating rate/receive fixed rate Fair value decreases Fair value increases
Currency forwards/swaps U.S. dollar strengthens U.S. dollar weakens
Pay U.S. dollars/receive foreign currency Fair value decreases Fair value increases
Receive U.S. dollars/pay foreign currency Fair value increases Fair value decreases
Commodity derivatives Price increases Price decreases
Receive commodity/ pay fixed price Fair value increases Fair value decreases
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