Navy Federal Credit Union 2015 Annual Report Download - page 31

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Navy Federal Credit Union12
sales contracts and mortgage loans Navy Federal intends to sell are recorded at fair value with
changes in fair value included in Net gains on mortgage loan sales in the Consolidated Statements
of Income.
Accounting Hedges
Under the provisions of ASC 815, Derivatives and Hedging, derivative instruments can be
designated as fair value hedges or cash flow hedges.
Fair value hedges are used to protect against changes in the fair value of assets and liabilities
that are attributable to interest rate volatility. Navy Federal uses interest rate swaps as fair value
hedges against the value of its fixed-rate AFS securities.
Cash flow hedges are used primarily to minimize the variability in cash flows of assets or liabilities
or forecasted transactions caused by interest rate fluctuations. Navy Federal uses interest rate
swaps to hedge against the variability in cash flows of its floating-rate debt payments and
forecasted replacement debt.
At the inception of hedge relationships, Navy Federal formally documents the hedged item, the
particular risk management objective, the nature of the risk being hedged, the derivative being
used, how eectiveness of the hedge will be assessed and how ineectiveness of the hedge will
be measured. Navy Federal primarily uses regression analysis at the inception of a hedge and for
each reporting period thereafter to assess whether the derivative used in a hedging transaction
is expected to be, and has been, highly eective in osetting changes in the fair value or cash
flows of a hedged item.
Navy Federal discontinues hedge accounting when it is determined the derivative is not expected
to be or has ceased to be highly eective as a hedge; the derivative expires or is sold, terminated or
exercised; the derivative is de-designated; 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 frame. Subsequent
to discontinuing a fair value or cash flow hedge, the derivative will continue to be recorded on
the balance sheet at fair value, with changes in fair value included in earnings. For a discontinued
fair value hedge, the previously hedged item is no longer adjusted for changes in fair value. For
a discontinued cash flow hedge that is discontinued because the forecasted transaction is no
longer probable to occur, the previously unrealized gain or loss in AOCI is recognized in earnings
immediately; otherwise, for the other discontinuing type events, the unrealized gain or loss
continues to be deferred in AOCI until the forecasted transaction aects earnings. Navy Federal
did not discontinue hedge accounting for any hedges in either 2015 or 2014.
All derivative financial instruments are recognized at fair value and classified as Other assets or
Other liabilities in the Consolidated Statements of Financial Condition. See Note 9: Derivative
Instruments and Hedging Activities for details.
Pension Accounting and Retirement Benefit Plans
Navy Federal has a defined benefit pension plan, 401(k) defined contribution and 457(b)
savings plans, and a non-qualified supplemental retirement plan. Navy Federal also provides a
postretirement medical plan for certain retired employees. Navy Federal accounts for its defined
benefit pension plans in accordance with ASC 715, Compensation—Retirement Benefits. See
Note 17: Retirement Benefit Plans for details.