Citibank 2009 Annual Report Download - page 143

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The hedge relationship must be formally documented at inception, detailing
the particular risk management objective and strategy for the hedge, which
includes the item and risk that is being hedged and the derivative that is
being used, as well as how effectiveness will be assessed and ineffectiveness
measured. The effectiveness of these hedging relationships is evaluated on
a retrospective and prospective basis, typically using quantitative measures
of correlation with hedge ineffectiveness measured and recorded in current
earnings. If a hedge relationship is found to be ineffective, it no longer
qualifies as a hedge and hedge accounting would not be applied. Any gains
or losses attributable to the derivatives, as well as subsequent changes in fair
value, are recognized in Other revenue with no offset on the hedged item,
similar to trading derivatives.
The foregoing criteria are applied on a decentralized basis, consistent with
the level at which market risk is managed, but are subject to various limits
and controls. The underlying asset, liability or forecasted transaction may be
an individual item or a portfolio of similar items.
For fair value hedges, in which derivatives hedge the fair value of assets
or liabilities, changes in the fair value of derivatives are reflected in Other
revenue, together with changes in the fair value of the related hedged
risk. These are expected to, and generally do, offset each other. Any net
amount, representing hedge ineffectiveness, is reflected in current earnings.
Citigroup’s fair value hedges are primarily hedges of fixed-rate long-term
debt, and available-for-sale securities.
For cash flow hedges, in which derivatives hedge the variability of cash
flows related to floating- and fixed-rate assets, liabilities or forecasted
transactions, the accounting treatment depends on the effectiveness of the
hedge. To the extent these derivatives are effective in offsetting the variability
of the hedged cash flows, the effective portion of the changes in the derivatives’
fair values will not be included in current earnings, but are reported in
Accumulated other comprehensive income (loss). These changes in fair
value will be included in earnings of future periods when the hedged cash
flows impact earnings. To the extent these derivatives are not effective, changes
in their fair values are immediately included in Other revenue. Citigroup’s
cash flow hedges primarily include hedges of floating- and fixed-rate debt, as
well as rollovers of short-term fixed-rate liabilities and floating-rate liabilities.
For net investment hedges in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting treatment
will similarly depend on the effectiveness of the hedge. The effective portion of
the change in fair value of the derivative, including any forward premium or
discount, is reflected in Accumulated other comprehensive income (loss) as
part of the foreign currency translation adjustment.
End-user derivatives that are economic hedges, rather than qualifying
for hedge accounting, are also carried at fair value, with changes in value
included in Principal transactions or Other revenue. Citigroup often
uses economic hedges when qualifying for hedge accounting would be too
complex or operationally burdensome; examples are hedges of the credit
risk component of commercial loans and loan commitments. Citigroup
periodically evaluates its hedging strategies in other areas and may designate
either a qualifying hedge or an economic hedge, after considering the
relative cost and benefits. Economic hedges are also employed when the
hedged item itself is marked-to-market through current earnings, such as
hedges of commitments to originate one-to-four-family mortgage loans to be
held-for-sale and mortgage servicing rights (MSRs).
For those hedge relationships that are terminated or when hedge designations
are removed, the hedge accounting treatment described in the paragraphs above
is no longer applied. Instead, the end-user derivative is terminated or transferred
to the trading account. For fair value hedges, any changes in the fair value of the
hedged item remain as part of the basis of the asset or liability and are ultimately
reflected as an element of the yield. For cash flow hedges, any changes in fair
value of the end-user derivative remain in Accumulated other comprehensive
income (loss) and are included in earnings of future periods when the hedged
cash flows impact earnings. However, if the hedged forecasted transaction is no
longer likely to occur, any changes in fair value of the end-user derivative are
immediately reflected in Other revenue.
Employee Benefits Expense
Employee benefits expense includes current service costs of pension and
other postretirement benefit plans, which are accrued on a current basis,
contributions and unrestricted awards under other employee plans, the
amortization of restricted stock awards and costs of other employee benefits.
Stock-Based Compensation
The Company recognizes compensation expense related to stock and
option awards over the requisite service period based on the instruments’
grant date fair value, reduced by expected forfeitures. Compensation cost
related to awards granted to employees who meet certain age plus years-
of-service requirements (retirement eligible employees) is accrued in the
year prior to the grant date, in the same manner as the accrual for cash
incentive compensation.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which the Company
operates. These tax laws are complex and subject to different interpretations
by the taxpayer and the relevant governmental taxing authorities. In
establishing a provision for income tax expense, the Company must make
judgments and interpretations about the application of these inherently
complex tax laws. The Company must also make estimates about when
in the future certain items will affect taxable income in the various tax
jurisdictions, both domestic and foreign.
Disputes over interpretations of the tax laws may be subject to review/
adjudication by the court systems of the various tax jurisdictions or may be
settled with the taxing authority upon examination or audit.
The Company implemented FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (FIN 48) (now ASC 740, Income Taxes),
on January 1, 2007, which sets out a consistent framework to determine the
appropriate level of tax reserves to maintain for uncertain tax positions. See
“Accounting Changes.”