Capital One 2011 Annual Report Download - page 224

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Accounting for Derivatives
We account for derivatives pursuant to the accounting standards for derivatives and hedging. The outstanding
notional amount of our derivative contracts totaled $73.2 billion as of December 31, 2011, compared with $50.7
billion as of December 31, 2010. The notional amount provides an indication of the volume of our derivatives
activity and is used as the basis on which interest and other payments are determined; however, it is generally not
the amount exchanged. Derivatives are recorded at fair value in our consolidated balance sheets. The fair value of
a derivative represents our estimate of the amount at which a derivative could be exchanged in an orderly
transaction between market participants. We report derivatives in a gain position, or derivative assets, in our
consolidated balance sheets as a component of other assets. We report derivatives in a loss position, or derivative
liabilities, in our consolidated balance sheets as a component of other liabilities. We report derivative asset and
liability amounts on a gross basis based on individual contracts, which does not take into consideration the
effects of master counterparty netting agreements or collateral netting. The fair value of derivative assets and
derivative liabilities reported in our consolidated balance sheets was $1.9 billion and $987 million, respectively,
as of December 31, 2011, compared with $1.3 billion and $636 million, respectively, as of December 31, 2010.
Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Free-standing
derivatives consist of customer-accommodation derivatives and economic hedges that we enter into for risk
management purposes that are not linked to specific assets or liabilities or to forecasted transactions and,
therefore, do not qualify for hedge accounting. Qualifying accounting hedges are designated as fair value hedges,
cash flow hedges or net investment hedges.
•Fair Value Hedges: We designate derivatives as fair value hedges to manage our exposure to changes in the
fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in
interest rates. Changes in the fair value of derivatives designated as fair value hedges are recorded in
earnings together with offsetting changes in the fair value of the hedged item and any resulting
ineffectiveness. Our fair value hedges consist of interest rate swaps that are intended to modify our exposure
to interest rate risk on various fixed rate senior notes, subordinated notes, securitization debt, brokered
certificates of deposits and U.S. agency investments. These hedges have maturities through 2019 and have
the effect of converting some of our fixed rate debt, deposits and investments to variable rate.
•Cash Flow Hedges: We designate derivatives as cash flow hedges to manage our exposure to variability in
cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash
flow hedges are recorded as a component of AOCI, to the extent that the hedge relationships are effective,
and amounts are reclassified from AOCI to earnings as the forecasted transactions occur. To the extent that
any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings.
Our cash flow hedges consist of interest rate swaps that are intended to hedge the variability in interest
payments on some of our variable rate debt issuances and assets through 2017. These hedges have the effect
of converting some of our variable rate debt and assets to a fixed rate. We also have entered into forward
foreign currency derivative contracts to hedge our exposure to variability in cash flows related to foreign
currency denominated debt.
•Net Investment Hedges: We use net investment hedges, primarily forward foreign exchange contracts, to
manage the exposure related to our net investments in consolidated foreign operations that have functional
currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the
translation adjustment component of AOCI. During the third quarter of 2011, we discontinued hedge
accounting on our only net investment hedge. Therefore, we did not have any net investment hedges
outstanding as of December 31, 2011.
•Free-Standing Derivatives: We use free-standing derivatives, or economic hedges, to hedge the risk of
changes in the fair value of residential MSRs, mortgage loan origination and purchase commitments and
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