Goldman Sachs 2013 Annual Report Download - page 152

Notes to Consolidated Financial Statements
Net Investment Hedges
The firm seeks to reduce the impact of fluctuations in
foreign exchange rates on its net investment in certain non-
U.S. operations through the use of foreign currency forward
contracts and foreign currency-denominated debt. For
foreign currency forward contracts designated as hedges,
the effectiveness of the hedge is assessed based on the
overall changes in the fair value of the forward contracts
(i.e., based on changes in forward rates). For foreign
currency-denominated debt designated as a hedge, the
effectiveness of the hedge is assessed based on changes in
spot rates.
For qualifying net investment hedges, the gains or losses on
the hedging instruments, to the extent effective, are
included in “Currency translation” within the consolidated
statements of comprehensive income.
The table below presents the gains/(losses) from net
investment hedging.
Year Ended December
in millions 2013 2012 2011
Currency hedges $150 $(233) $ 160
Foreign currency-denominated debt hedges 470 347 (147)
The gain/(loss) related to ineffectiveness was not material
for 2013, 2012 or 2011. The loss reclassified to earnings
from accumulated other comprehensive income was not
material for 2013 or 2012, and was $186 million for 2011.
As of December 2013 and December 2012, the firm had
designated $1.97 billion and $2.77 billion, respectively, of
foreign currency-denominated debt, included in
“Unsecured long-term borrowings” and “Unsecured short-
term borrowings,” as hedges of net investments in non-
U.S. subsidiaries.
Cash Flow Hedges
Beginning in the third quarter of 2013, the firm designated
certain commodities-related swap and forward contracts as
cash flow hedges. These swap and forward contracts hedge
the firm’s exposure to the variability in cash flows
associated with the forecasted sales of certain energy
commodities by one of the firm’s consolidated investments.
The firm applies a statistical method that utilizes regression
analysis when assessing hedge effectiveness. A cash flow
hedge is considered highly effective in offsetting changes in
forecasted cash flows attributable to 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 cash flow hedges, the gains or losses on
derivatives, to the extent effective, are included in “Cash
flow hedges” within the consolidated statements of
comprehensive income. Gains or losses resulting from
hedge ineffectiveness are included in “Other principal
transactions” in the consolidated statements of earnings.
The effective portion of the gains, before taxes, recognized on
these cash flow hedges was $14 million for 2013. The
gain/(loss) related to hedge ineffectiveness was not material
for 2013. There were no gains/(losses) excluded from the
assessment of hedge effectiveness or reclassified to earnings
from accumulated other comprehensive income during 2013.
The amounts recorded in “Cash flow hedges” will be
reclassified to “Other principal transactions” in the same
periods as the corresponding gain or loss on the sale of the
hedged energy commodities, which is also recorded in
“Other principal transactions.” The firm expects to
reclassify $5 million of gains, net of taxes, related to cash
flow hedges from “Cash flow hedges” to earnings within
the next twelve months. The length of time over which the
firm is hedging its exposure to the variability in future cash
flows for forecasted transactions is approximately
two years.
150 Goldman Sachs 2013 Annual Report