Ameriprise 2010 Annual Report Download - page 62

Derivative Instruments and Hedging Activities
We use derivative instruments to manage our exposure to various market risks. Examples include index options, interest
rate swaps and swaptions, total return swaps, and futures that economically hedge the equity and interest rate exposure of
derivatives embedded in certain annuity and certificate liabilities, as well as exposure to price risk arising from affiliated
mutual fund seed money investments. All derivatives are recorded at fair value. The fair value of our derivative instruments
is determined using either market quotes or valuation models that are based upon the net present value of estimated
future cash flows and incorporate current market observable inputs to the extent available.
The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting
hedge designation, if any. We primarily use derivatives as economic hedges that are not designated as accounting hedges
or do not qualify for hedge accounting treatment. We occasionally designate derivatives as (i) hedges of changes in the fair
value of assets, liabilities or firm commitments (‘‘fair value hedges’’), (ii) hedges of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset or liability (‘‘cash flow hedges’’) or (iii) hedges
of foreign currency exposures of net investments in foreign operations (‘‘net investment hedges in foreign operations’’).
Our policy is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same
counterparty under the same master netting arrangement. For derivative instruments that do not qualify for hedge
accounting or are not designated as hedges, changes in fair value are recognized in current period earnings. The changes
in fair value of derivatives hedging variable annuity living benefits and certain variable annuity death benefits, when
applicable, are included within benefits, claims, losses and settlement expenses. The changes in fair value of derivatives
hedging equity indexed annuities and stock market certificates are included within interest credited to fixed accounts and
banking and deposit interest expense, respectively. The changes in fair value of derivatives hedging equity price risk of
Ameriprise Financial, Inc. common stock granted as part of the Ameriprise Financial Franchise Advisor Deferred Equity Plan
are included in distribution expenses. The changes in fair value of all other derivatives that do not qualify for hedge
accounting or are not designated as hedges are a component of net investment income.
For derivative instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as changes
in the fair value of the hedged assets, liabilities or firm commitments, are recognized on a net basis in current period
earnings. The carrying value of the hedged item is adjusted for the change in fair value from the designated hedged risk. If
a fair value hedge designation is removed or the hedge is terminated prior to maturity, previous adjustments to the carrying
value of the hedged item are recognized into earnings over the remaining life of the hedged item.
For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative
instruments is reported in accumulated other comprehensive income (loss) and reclassified into earnings when the hedged
item or transaction impacts earnings. The amount that is reclassified into earnings is presented in the Consolidated
Statements of Operations with the hedged instrument or transaction impact. Any ineffective portion of the gain or loss is
reported in current period earnings as a component of net investment income. If a hedge designation is removed or a
hedge is terminated prior to maturity, the amount previously recorded in accumulated other comprehensive income (loss) is
reclassified to earnings over the period that the hedged item impacts earnings. For any hedge relationships that are
discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related
amounts previously recorded in accumulated other comprehensive income (loss) are recognized in earnings immediately.
For derivative instruments that qualify as net investment hedges in foreign operations, the effective portion of the change
in fair value of the derivatives is recorded in accumulated other comprehensive income (loss) as part of the foreign
currency translation adjustment. Any ineffective portion of net investment hedges in foreign operations is recognized in net
investment income during the period of change.
For further details on the types of derivatives we use and how we account for them, see Note 2 and Note 16 to our
Consolidated Financial Statements.
Income Tax Accounting
Income taxes, as reported in our Consolidated Financial Statements, represent the net amount of income taxes that we
expect to pay to or receive from various taxing jurisdictions in connection with our operations. We provide for income taxes
based on amounts that we believe we will ultimately owe taking into account the recognition and measurement for
uncertain tax positions. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment
of certain items. In the event that the ultimate tax treatment of items differs from our estimates, we may be required to
significantly change the provision for income taxes recorded in our Consolidated Financial Statements.
In connection with the provision for income taxes, our Consolidated Financial Statements reflect certain amounts related to
deferred tax assets and liabilities, which result from temporary differences between the assets and liabilities measured for
financial statement purposes versus the assets and liabilities measured for tax return purposes. Included in deferred tax
assets are significant capital losses that have been recognized for financial statement purposes but not yet for tax return
purposes as well as future deductible capital losses realized for tax return purposes. Under current U.S. federal income tax
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