Discover 2009 Annual Report Download - page 150

Derivative Assets
As of November 30, 2009
Derivative Liabilities
As of November 30, 2009
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Interest rate swaps designated as hedging instruments ............................................................. Other assets $400 Accrued expenses
and other liabilities
$—
Interest rate swaps not designated as hedging instruments ........................................................ Other assets $969 Accrued expenses
and other liabilities
$—
At November 30, 2008, the notional amount of the Company’s interest rate swap agreements outstanding was $658
million and the weighted average years to maturity was 9.6 years.
For the Company’s derivative financial instruments that were designated as hedging instruments, changes in the fair
value of the derivative contracts and the interest-bearing deposits were recorded in interest expense. Interest expense also
included the effect of the termination of derivatives and hedged deposits, as well as the amortization of basis adjustments
to the fair value of the interest-bearing deposits that arose from the previous designated hedging relationships. For
derivative contracts that were not designated or did not qualify as fair value hedges, the Company recorded changes in
the fair values of these derivative contracts in other income.
The table below presents the effect of the Company’s derivatives on the consolidated statements of income for the year
ended November 30, 2009 (dollars in thousands):
For the Year Ended November 30, 2009
Location of
Gain/(Loss)
Recognized in Income
Gain/(Loss)
on Derivative
Gain/(Loss)
on Hedged Item
Net Amount of
Gain/(Loss)
Recognized in Income
Derivatives designated as fair value hedging instruments: .................. Interest expense-
Ineffectiveness $1,127 $ (2,334) $ (1,207)
Interest expense-
Other $6,675 $11,139 $17,814
Derivatives not designated as hedging instruments:........................... Other income $1,819 $ — $ 1,819
For the years ended November 30, 2008 and 2007, interest expense included $14.7 million in contra-expense and
$1.9 million in expense, respectively, related to designated financial instruments qualifying as fair value hedges. During
those same periods, other income included gains of $0.5 million and losses of $18.8 million, respectively, related to the
change in fair value of derivative financial instruments that did not qualify as fair value hedges. For the years ended
November 30, 2008 and 2007, other income also included gains of $13.7 million and losses of $13.7 million,
respectively, related to foreign currency exchange contracts that the Company entered into to economically hedge short-
term funding provided to a former U.K. subsidiary of the Company with a non-dollar currency denomination, the
borrowing of which was eliminated in consolidation.
The Company limits its credit exposure on derivatives by entering into contracts with institutions that are established
dealers and that maintain certain minimum credit criteria established by the Company. The Company does not have any
credit support arrangements with respect to outstanding derivative contracts that would require the posting of collateral
when in a liability position. The Company’s exposure to counterparties at November 30, 2009 was not material.
Assets and Liabilities Measured at Fair Value on a Recurring Basis. ASC 820 defines fair value, establishes a fair value
hierarchy that distinguishes between valuations that are based on observable inputs from those based on unobservable
inputs, and requires certain disclosures about those measurements. The table below presents information about the
Company’s assets and liabilities measured at fair value on a recurring basis at November 30, 2009, and indicates the
level within the fair value hierarchy with which each of those items is associated. In general, fair values determined by
Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities
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