KeyBank 2015 Annual Report Download - page 142

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.
Additional information regarding the accounting for derivatives is provided in Note 8 (“Derivatives and Hedging
Activities”).
Offsetting Derivative Positions
In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and
master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net
basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets
and liabilities. Additional information regarding derivative offsetting is provided in Note 8 (“Derivatives and
Hedging Activities”).
Servicing Assets
We service commercial real estate loans. Servicing assets related to all commercial real estate loan servicing
totaled $321 million at December 31, 2015, and $323 million at December 31, 2014, and are included in
“accrued income and other assets” on the balance sheet.
Servicing assets and liabilities purchased or retained initially are measured at fair value. When no ready market
value (such as quoted market prices, or prices based on sales or purchases of similar assets) is available to
determine the fair value of servicing assets, fair value is determined by calculating the present value of future
cash flows associated with servicing the loans. This calculation is based on a number of assumptions, including
the market cost of servicing, the discount rate, the prepayment rate, and the default rate.
We remeasure our servicing assets using the amortization method at each reporting date. The amortization of
servicing assets is determined in proportion to, and over the period of, the estimated net servicing income and
recorded in “mortgage servicing fees” on the income statement.
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