KeyBank 2013 Annual Report Download - page 137

generally are carried at cost. The carrying amounts of the investments carried at cost are adjusted for declines in
value if they are considered to be other-than-temporary. These adjustments are included in “net gains (losses)
from principal investing” on the income statement.
Repurchase agreements
We enter into repurchase and reverse repurchase agreements primarily to acquire securities to cover short
positions, to accommodate customers’ financing needs, and to settle other securities obligations. Repurchase and
reverse repurchase agreements are accounted for as collateralized financing transactions and recorded on our
balance sheet at the amounts at which the securities will be subsequently sold or repurchased. The value of our
repurchase and reverse repurchase agreements is based on the valuation of the underlying securities, as further
described under the “Other assets and liabilities” heading in Note 6 (“Fair Value Measurements”). Fees received
in connection with these transactions are recorded in interest income; fees paid are recorded in interest expense.
Derivatives
In accordance with applicable accounting guidance, all derivatives are recognized as either assets or liabilities on
the balance sheet at fair value. The net increase or decrease in derivatives is included in “other operating
activities, net” within the statement of cash flows.
Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the
derivative has been designated and qualifies as part of a hedge relationship, and further, on the type of hedge
relationship. For derivatives that are not designated as hedging instruments, any gain or loss is recognized
immediately in earnings. A derivative that is designated and qualifies as a hedging instrument must be designated
as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.
A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities and
commitments caused by changes in interest rates or other economic factors. The effective portion of a change in
the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a
change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change
in the fair value of such a hedging instrument is recognized in “other income” on the income statement, with no
corresponding offset.
A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest
rates or other economic factors. The effective portion of a gain or loss on a cash flow hedge is recorded as a
component of AOCI on the balance sheet, and reclassified to earnings in the same period in which the hedged
transaction affects earnings. The ineffective portion of a cash flow hedge is included in “other income” on the
income statement.
A net investment hedge is used to hedge the exposure of changes in the carrying value of investments as a result
of changes in the related foreign exchange rates. The effective portion of a gain or loss on a net investment hedge
is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional
and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged
transaction affects earnings. The ineffective portion of a net investment hedge is included in “other income” on
the income statement.
Hedge “effectiveness” is determined by the extent to which changes in the fair value of a derivative instrument
offset changes in the fair value, cash flows, or carrying value attributable to the risk being hedged. If the
relationship between the change in the fair value of the derivative instrument and the change in the hedged item
falls within a range considered to be the industry norm, the hedge is considered “highly effective” and qualifies
for hedge accounting. A hedge is “ineffective” if the relationship between the changes falls outside the
acceptable range. In that case, hedge accounting is discontinued on a prospective basis. Hedge effectiveness is
tested at least quarterly.
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