PNC Bank 2010 Annual Report Download - page 118
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Please find page 118 of the 2010 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.We utilize a net presentation for derivative instruments on the
Consolidated Balance Sheet taking into consideration the
effects of legally enforceable master netting agreements. Cash
collateral exchanged with counterparties is also netted against
the applicable derivative exposures by offsetting obligations to
return or rights to reclaim cash collateral against the fair
values of the net derivatives being collateralized.
For those derivative instruments that are designated and
qualify as accounting hedges, we designate the hedging
instrument, based on the exposure being hedged, as either a
fair value hedge or a cash flow hedge. We have no derivatives
that hedge the net investment in a foreign operation.
We formally document the relationship between the hedging
instruments and hedged items, as well as the risk management
objective and strategy, before undertaking an accounting
hedge. To qualify for hedge accounting, the derivatives and
related hedged items must be designated as a hedge at
inception of the hedge relationship. For accounting hedge
relationships, we formally assess, both at the inception of the
hedge and on an ongoing basis, if the derivatives are highly
effective in offsetting designated changes in the fair value or
cash flows of the hedged item. If it is determined that the
derivative instrument is not highly effective, hedge accounting
is discontinued.
For derivatives that are designated as fair value hedges (i.e.,
hedging the exposure to changes in the fair value of an asset
or a liability attributable to a particular risk, such as changes
in LIBOR), changes in the fair value of the hedging
instrument are recognized in earnings and offset by
recognizing changes in the fair value of the hedged item
attributable to the hedged risk. To the extent the change in fair
value of the derivative does not offset the change in fair value
of the hedged item, the difference or ineffectiveness is
reflected in the Consolidated Income Statement in the same
financial statement category as the hedged item.
For derivatives designated as cash flow hedges (i.e., hedging
the exposure to variability in expected future cash flows), the
effective portions of the gain or loss on derivatives are
reported as a component of Accumulated other comprehensive
income (loss) and subsequently reclassified to interest income
in the same period or periods during which the hedged
transaction affects earnings. The change in fair value of any
ineffective portion of the hedging instrument is recognized
immediately in noninterest income.
We discontinue hedge accounting when it is determined that
the derivative no longer qualifies as an effective hedge; the
derivative expires or is sold, terminated or exercised; or the
derivative is de-designated as a fair value or cash flow hedge
or, for a cash flow hedge, it is no longer probable that the
forecasted transaction will occur by the end of the originally
specified time period. If we determine that the derivative no
longer qualifies as a fair value or cash flow hedge and hedge
accounting is discontinued, the derivative will continue to be
recorded on the balance sheet at its fair value with changes in
fair value included in current earnings. For a discontinued fair
value hedge, the previously hedged item is no longer adjusted
for changes in fair value.
When hedge accounting is discontinued because it is no longer
probable that a forecasted transaction will occur, the
derivative will continue to be recorded on the balance sheet at
its fair value with changes in fair value included in current
earnings, and the gains and losses in Accumulated other
comprehensive income (loss) will be recognized immediately
into earnings. When we discontinue hedge accounting because
the hedging instrument is sold, terminated or no longer
designated, the amount reported in Accumulated other
comprehensive income (loss) up to the date of sale,
termination or de-designation continues to be reported in
Other comprehensive income or loss until the forecasted
transaction affects earnings. We did not terminate any cash
flow hedges in 2010, 2009 or 2008 due to a determination that
a forecasted transaction was no longer probable of occurring.
We occasionally purchase or originate financial instruments
that contain an embedded derivative. At the inception of the
transaction, we assess if the economic characteristics of the
embedded derivative are clearly and closely related to the
economic characteristics of the host contract, whether the
hybrid financial instrument that embodied both the embedded
derivative and the host contract are measured at fair value
with changes in fair value reported in earnings, and whether a
separate instrument with the same terms as the embedded
instrument would not meet the definition of a derivative. If the
embedded derivative does not meet these three conditions, the
embedded derivative would qualify as a derivative and be
recorded apart from the host contract and carried at fair value
with changes recorded in current earnings unless we elect to
account for the hybrid financial instrument at fair value.
We have elected fair value measurement for certain hybrid
financial instruments on an instrument-by-instrument basis.
We enter into commitments to originate loans for sale. We
also enter into commitments to purchase or sell commercial
and residential real estate loans. These commitments are
accounted for as free-standing derivatives which are recorded
at fair value in Other assets or Other liabilities on the
Consolidated Balance Sheet. Any gain or loss from the change
in fair value after the inception of the commitment is
recognized in noninterest income.
I
NCOME
T
AXES
We account for income taxes under the asset and liability
method. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that we expect will apply at the
time when we believe the differences will reverse. The
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