Citibank 2008 Annual Report Download - page 197

recorded in the cumulative translation adjustment account and the
ineffective portion, if any, is immediately recorded in earnings.
For derivatives used in net investment hedges, Citigroup follows the
forward-rate method from FASB Derivative Implementation Group Issue H8.
According to that method, all changes in fair value, including changes
related to the forward-rate component of the foreign-currency forward
contracts and the time-value of foreign-currency options, are recorded in the
cumulative translation adjustment account. For foreign-currency-
denominated debt instruments that are designated as hedges of net
investments, the translation gain or loss that is recorded in the cumulative
translation adjustment account is based on the spot exchange rate between
the functional currency of the respective subsidiary and the U.S. dollar,
which is the functional currency of Citigroup. To the extent the notional
amount of the hedging instrument exactly matches the hedged net
investment and the underlying exchange rate of the derivative hedging
instrument relates to the exchange rate between the functional currency of
the net investment and Citigroup’s functional currency (or, in the case of the
non-derivative debt instrument, such instrument is denominated in the
functional currency of the net investment), no ineffectiveness is recorded in
earnings.
Hedge effectiveness
Key aspects of achieving SFAS 133 hedge accounting are documentation of
hedging strategy and hedge effectiveness at the hedge inception and
substantiating hedge effectiveness on an ongoing basis. A derivative must be
highly effective in accomplishing the hedge objective of offsetting either
changes in the fair value or cash flows of the hedged item for the risk being
hedged. Any ineffectiveness in the hedge relationship is recognized in current
earnings. The assessment of effectiveness excludes changes in the value of
the hedged item that are unrelated to the risks being hedged. Similarly, the
assessment of effectiveness may exclude changes in the fair value of a
derivative related to time value that, if excluded, are recognized in current
earnings.
The following table summarizes certain information related to the
Company’s hedging activities for the years ended December 31, 2008, 2007
and 2006:
In millions of dollars 2008 2007 2006
Fair value hedges
Hedge ineffectiveness recognized in earnings $ (559) $ 91 $ 245
Net gain excluded from assessment of
effectiveness 178 420 302
Cash flow hedges
Hedge ineffectiveness recognized in earnings (27) — (18)
Net gain (loss) excluded from assessment of
effectiveness (17) ——
Net investment hedges
Net gain (loss) included in foreign currency
translation adjustment in accumulated other
comprehensive income $2,811 $(1,051) $(569)
For cash flow hedges, any changes in the fair value of the end-user
derivative remaining in Accumulated other comprehensive income (loss)
on the Consolidated Balance Sheet will be included in earnings of future
periods to offset the variability of the hedged cash flows when such cash flows
affect earnings. The net loss associated with cash flow hedges expected to be
reclassified from Accumulated other comprehensive income within 12
months of December 31, 2008 is approximately $1.9 billion.
The change in Accumulated other comprehensive income (loss) from
cash flow hedges for the years ended December 31, 2008, 2007 and 2006 can
be summarized as follows (after-tax):
In millions of dollars 2008 2007 2006
Beginning balance $(3,163) $ (61) $ 612
Net gain (loss) from cash flow hedges (2,738) (2,932) (29)
Net amounts reclassified to earnings 712 (170) (644)
Ending balance $(5,189) $(3,163) $ (61)
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