Goldman Sachs 2013 Annual Report Download - page 151

Notes to Consolidated Financial Statements
Hedge Accounting
The firm applies hedge accounting for (i) certain interest
rate swaps used to manage the interest rate exposure of
certain fixed-rate unsecured long-term and short-term
borrowings and certain fixed-rate certificates of deposit,
(ii) certain foreign currency forward contracts and foreign
currency-denominated debt used to manage foreign
currency exposures on the firm’s net investment in certain
non-U.S. operations and (iii) certain commodities-related
swap and forward contracts used to manage the exposure
to the variability in cash flows associated with the
forecasted sales of certain energy commodities by one of the
firm’s consolidated investments.
To qualify for hedge accounting, the derivative hedge must
be highly effective at reducing the risk from the exposure
being hedged. Additionally, the firm must formally
document the hedging relationship at inception and test the
hedging relationship at least on a quarterly basis to ensure
the derivative hedge continues to be highly effective over the
life of the hedging relationship.
Fair Value Hedges
The firm designates certain interest rate swaps as fair value
hedges. These interest rate swaps hedge changes in fair
value attributable to the designated benchmark interest rate
(e.g., London Interbank Offered Rate (LIBOR) or OIS),
effectively converting a substantial portion of fixed-rate
obligations into floating-rate obligations.
The firm applies a statistical method that utilizes regression
analysis when assessing the effectiveness of its fair value
hedging relationships in achieving offsetting changes in the
fair values of the hedging instrument and the risk being
hedged (i.e., interest rate risk). An interest rate swap is
considered highly effective in offsetting changes in fair value
attributable to changes in the hedged risk when the
regression analysis results in a coefficient of determination
of 80% or greater and a slope between 80% and 125%.
For qualifying fair value hedges, gains or losses on
derivatives are included in “Interest expense.” The change
in fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value
and is subsequently amortized into interest expense over its
remaining life. Gains or losses resulting from hedge
ineffectiveness are included in “Interest expense.” When a
derivative is no longer designated as a hedge, any remaining
difference between the carrying value and par value of the
hedged item is amortized to interest expense over the
remaining life of the hedged item using the effective interest
method. See Note 23 for further information about interest
income and interest expense.
The table below presents the gains/(losses) from interest
rate derivatives accounted for as hedges, the related hedged
borrowings and bank deposits, and the hedge
ineffectiveness on these derivatives, which primarily
consists of amortization of prepaid credit spreads resulting
from the passage of time.
Year Ended December
in millions 2013 2012 2011
Interest rate hedges $(8,683) $(2,383) $ 4,679
Hedged borrowings and bank deposits 6,999 665 (6,300)
Hedge ineffectiveness $(1,684) $(1,718) $(1,621)
Goldman Sachs 2013 Annual Report 149