Citibank 2015 Annual Report Download - page 163

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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 hedged item related
to the hedged risk. These amounts 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
is 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-
rate debt and floating-rate assets, including loans and securities purchased
under agreements to resell, as well as rollovers of short-term fixed-rate
liabilities and floating-rate liabilities and forecasted debt issuances.
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.
For those accounting 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 it becomes probable that some or all of the hedged forecasted
transactions will not occur, any amounts that remain in Accumulated other
comprehensive income (loss) related to these transactions are immediately
reflected in Other revenue.
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 costs 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 MSRs. See Note 23 to the Consolidated Financial Statements
for a further discussion of the Company’s hedging and derivative activities.
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.
For its most significant pension and postretirement benefit plans (Significant
Plans), Citigroup measures and discloses plan obligations, plan assets
and periodic plan expense quarterly, instead of annually. The effect of
remeasuring the Significant Plan obligations and assets by updating plan
actuarial assumptions on a quarterly basis is reflected in Accumulated other
comprehensive income (loss) and periodic plan expense. All other plans
(All Other Plans) are remeasured annually. See Note 8 to the Consolidated
Financial Statements.
Stock-Based Compensation
The Company recognizes compensation expense related to stock and option
awards over the requisite service period, generally 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. Certain stock awards with performance conditions or certain
clawback provisions are subject to variable accounting, pursuant to which
the associated compensation expense fluctuates with changes in Citigroup’s
stock price. See Note 7 to the Consolidated Financial Statements.
Income Taxes
The Company is subject to the income tax laws of the U.S. and its states and
municipalities, and the foreign jurisdictions in which it 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
and adjudication by the court systems of the various tax jurisdictions or
may be settled with the taxing authority upon examination or audit. The
Company treats interest and penalties on income taxes as a component of
Income tax expense.