Ameriprise 2014 Annual Report Download - page 128

treatment. The Company occasionally designates 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’’).
Derivative instruments that are entered into for hedging purposes are designated as such at the time the Company enters
into the contract. For all derivative instruments that are designated for hedging activities, the Company documents all of
the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships.
Management also documents its risk management objectives and strategies for entering into the hedge transactions. The
Company assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in
offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a
hedge, the Company will discontinue the application of hedge accounting.
For derivative instruments that do not qualify for hedge accounting or are not designated as accounting hedges, changes in
fair value are recognized in current period earnings. Changes in fair value of derivatives are presented in the Consolidated
Statements of Operations based on the nature and use of the instrument. Changes in fair value of derivatives used as
economic hedges are presented in the Consolidated Statements of Operations with the corresponding change in the
hedged asset or liability.
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 AOCI 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 AOCI is reclassified to earnings over the period that the hedged item impacts earnings. For
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 AOCI 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 AOCI as part of the foreign currency translation adjustment. Any ineffective
portion of the net investment hedges in foreign operations is recognized in net investment income during the period of
change.
The equity component of equity indexed annuities (‘‘EIA’’), indexed universal life (‘‘IUL’’) and stock market certificate
obligations are considered embedded derivatives. Additionally, certain annuities contain GMAB and GMWB provisions. The
GMAB and the non-life contingent benefits associated with GMWB provisions are also considered embedded derivatives.
See Note 14 for information regarding the Company’s fair value measurement of derivative instruments and Note 16 for
the impact of derivatives on the Consolidated Statements of Operations.
Deferred Acquisition Costs
The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of
these costs which are incremental and direct to the acquisition of a new or renewal insurance policy or annuity contract
are deferred. Significant costs capitalized include sales based compensation related to the acquisition of new and renewal
insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee
compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation
paid to advisors and employees and third-party distributors is capitalized. Employee compensation and benefits costs which
are capitalized relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct
costs of acquiring an insurance policy or annuity contract are expensed as incurred. The DAC associated with insurance
policies or annuity contracts that are significantly modified or internally replaced with another contract are accounted for as
contract terminations. These transactions are anticipated in establishing amortization periods and other valuation
assumptions.
Costs deferred as DAC are amortized over time. For annuity and universal life (‘‘UL’’) contracts, DAC are amortized based
on projections of estimated gross profits over amortization periods equal to the approximate life of the business. For other
insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the
premium-paying period.
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