Citibank 2013 Annual Report Download - page 285

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The amount of hedge ineffectiveness on the cash flow hedges recognized in earnings for the years ended December 31, 2013, 2012 and 2011 is not
significant. The pretax change in Accumulated other comprehensive income (loss) from cash flow hedges is presented below:
Year ended December 31,
In millions of dollars 2013 2012 2011
Effective portion of cash flow hedges included in AOCI
Interest rate contracts $ 749 $ (322) $(1,827)
Foreign exchange contracts 34 143 81
Credit derivatives 14 — —
Total effective portion of cash flow hedges included in AOCI $ 797 $ (179) $(1,746)
Effective portion of cash flow hedges reclassified from AOCI to earnings
Interest rate contracts $(700) $ (837) $(1,227)
Foreign exchange contracts (176) (180) (257)
Total effective portion of cash flow hedges reclassified from AOCI to earnings (1) $(876) $(1,017) $(1,484)
(1) Included primarily in Other revenue and Net interest revenue on the Consolidated Income Statement.
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 (loss)
within 12 months of December 31, 2013 is approximately $0.4 billion.
The maximum length of time over which forecasted cash flows are hedged
is 10 years.
The after-tax impact of cash flow hedges on AOCI is shown in Note 20 to
the Consolidated Financial Statements.
Net Investment Hedges
Consistent with ASC 830-20, Foreign Currency Matters—Foreign
Currency Transactions (formerly SFAS 52, Foreign Currency
Translation), ASC 815 allows hedging of the foreign currency risk of a net
investment in a foreign operation. Citigroup uses foreign currency forwards,
options and foreign-currency-denominated debt instruments to manage
the foreign exchange risk associated with Citigroup’s equity investments in
several non-U.S.-dollar-functional-currency foreign subsidiaries. Citigroup
records the change in the carrying amount of these investments in the
Foreign currency translation adjustment account within Accumulated
other comprehensive income (loss). Simultaneously, the effective portion
of the hedge of this exposure is also recorded in the Foreign currency
translation adjustment account and the ineffective portion, if any, is
immediately recorded in earnings.
For derivatives designated as net investment hedges, Citigroup follows
the forward-rate method from FASB Derivative Implementation Group Issue
H8 (now ASC 815-35-35-16 through 35-26), “Foreign Currency Hedges:
Measuring the Amount of Ineffectiveness in a Net Investment Hedge.”
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
Foreign currency translation adjustment account within Accumulated
other comprehensive income (loss).
For foreign-currency-denominated debt instruments that are designated
as hedges of net investments, the translation gain or loss that is recorded in
the Foreign currency 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 a non-derivative debt instrument, such instrument is denominated in
the functional currency of the net investment), no ineffectiveness is recorded
in earnings.
The pretax gain (loss) recorded in the Foreign currency translation
adjustment account within Accumulated other comprehensive income
(loss), related to the effective portion of the net investment hedges, is
$2,370 million, $(3,829) million and $904 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
Credit Derivatives
A credit derivative is a bilateral contract between a buyer and a seller
under which the seller agrees to provide protection to the buyer against the
credit risk of a particular entity (“reference entity” or “reference credit”).
Credit derivatives generally require that the seller of credit protection make