FINANCIAL INSTRUMENTS |
FINANCIAL INSTRUMENTS
The following table provides information about assets and liabilities not carried at fair value. The table excludes finance leases and non-financial assets and liabilities. Substantially all of the assets discussed below are considered to be Level 3. The vast majority of our liabilities’ fair value can be determined based on significant observable inputs and thus considered Level 2. Few of the instruments are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity. | | | | | | | | | | | | | | | | June 30, 2017 | | December 31, 2016 | (In millions) | Carrying amount (net) |
| Estimated fair value |
| | Carrying amount (net) |
| Estimated fair value |
| | | | | | | GE | | | | | | Assets | | | | | | Investments and notes receivable | $ | 1,305 |
| $ | 1,355 |
| | $ | 1,526 |
| $ | 1,595 |
| Liabilities | | | | | | Borrowings(a)(b) | 29,650 |
| 30,455 |
| | 19,184 |
| 19,923 |
| Borrowings (debt assumed)(a)(c) | 52,291 |
| 59,603 |
| | 60,109 |
| 66,998 |
| | | | | | | GE Capital | | | | | | Assets | | | | | | Loans | 19,740 |
| 19,774 |
| | 21,060 |
| 20,830 |
| Other commercial mortgages | 1,471 |
| 1,554 |
| | 1,410 |
| 1,472 |
| Loans held for sale | 604 |
| 604 |
| | 473 |
| 473 |
| Other financial instruments(d) | 116 |
| 149 |
| | 121 |
| 150 |
| Liabilities | | | | | | Borrowings(a)(e)(f)(g) | 54,691 |
| 58,752 |
| | 58,523 |
| 62,024 |
| Investment contracts | 2,671 |
| 3,130 |
| | 2,813 |
| 3,277 |
|
| | (b) | Included $107 million and $115 million of accrued interest in estimated fair value at June 30, 2017 and December 31, 2016, respectively. |
| | (c) | Included $553 million and $803 million of accrued interest in estimated fair value at June 30, 2017 and December 31, 2016, respectively. |
| | (d) | Principally comprises cost method investments. |
| | (e) | Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at June 30, 2017 and December 31, 2016 would have been reduced by $2,478 million and $2,397 million, respectively. |
| | (f) | Included $808 million and $775 million of accrued interest in estimated fair value at June 30, 2017 and December 31, 2016, respectively. |
| | (g) | Excluded $48,216 million and $58,780 million of net intercompany payable to GE at June 30, 2017 and December 31, 2016, respectively. |
| | | | | | | | NOTIONAL AMOUNTS OF LOAN COMMITMENTS | | | | | | (In millions) | June 30, 2017 |
| December 31, 2016 |
| | | | Ordinary course of business lending commitments(a) | $ | 789 |
| $ | 687 |
| Unused revolving credit lines | 229 |
| 238 |
|
| | (a) | Excluded investment commitments of $259 million and $522 million at June 30, 2017 and December 31, 2016, respectively. |
DERIVATIVES AND HEDGING
FORMS OF HEDGING
In this section we explain the hedging methods we use and their effects on our financial statements.
Cash flow hedges – We use cash flow hedging primarily to reduce or eliminate the effects of foreign exchange rate changes on purchase and sale contracts in our industrial businesses and to convert foreign currency debt that we have issued in our financial services business back to our functional currency.
As part of our ongoing effort to reduce borrowings, we may repurchase debt that was in a cash flow hedge accounting relationship. At the time of determining that the debt cash flows are probable of not occurring any related OCI will be released to earnings. | | | | | | | | | | | | | | | FINANCIAL STATEMENT EFFECTS - CASH FLOW HEDGES | | Three months ended June 30 | | Six months ended June 30 | (In millions) | 2017 |
| 2016 |
| | 2017 |
| 2016 |
| | | | | | | Balance sheet changes | | | | | | Fair value of derivatives increase (decrease) | $ | 34 |
| $ | 11 |
| | $ | 56 |
| $ | (45 | ) | Shareowners' equity (increase) decrease | (34 | ) | (12 | ) | | (56 | ) | 45 |
| | | | | | | Earnings (loss) related to ineffectiveness | — |
| — |
| | — |
| 1 |
| Earnings (loss) effect of derivatives(a) | 65 |
| 14 |
| | 64 |
| (71 | ) |
| | (a) | Offsets earnings effect of the hedged forecasted transaction |
Fair value hedges – These derivatives are used to hedge the effects of interest rate and currency exchange rate changes on debt that we have issued. | | | | | | | | | | | | | | FINANCIAL STATEMENT EFFECTS - FAIR VALUE HEDGES | | | | | | | | | | | Three months ended June 30 | Six months ended June 30 | (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| | | | | | Balance sheet changes | | | | | Fair value of derivative increase (decrease) | $ | (57 | ) | $ | 888 |
| $ | (282 | ) | $ | 2,610 |
| Adjustment to carrying amount of hedged debt (increase) decrease | 2 |
| (933 | ) | 164 |
| (2,688 | ) | | | | | | Earnings (loss) related to hedge ineffectiveness | (56 | ) | (46 | ) | (118 | ) | (77 | ) |
Net investment hedges – We invest in foreign operations that conduct their financial services activities in currencies other than the US dollar. We hedge the currency risk associated with those investments primarily using short-term currency exchange contracts under which we receive US dollars and pay foreign currency and non-derivative instruments such as debt denominated in a foreign currency.
| | | | | | | | | | | | | | FINANCIAL STATEMENT EFFECTS - NET INVESTMENT HEDGES | | Three months ended June 30 | Six months ended June 30 | (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| | | | | | Balance sheet changes | | | | | Fair value of derivatives increase (decrease) | $ | (98 | ) | $ | (282 | ) | $ | (191 | ) | $ | 47 |
| Fair value of non-derivative instruments (increase) decrease | (389 | ) | (322 | ) | (859 | ) | (49 | ) | Shareowners' equity (increase) decrease | 490 |
| 609 |
| 1,063 |
| 40 |
| | | | | | Earnings (loss) related to | | | | | spot-forward differences and ineffectiveness | 3 |
| 5 |
| 13 |
| 37 |
| Earnings (loss) related to | | | | | reclassification upon sale or liquidation(a) | — |
| (380 | ) | 59 |
| (1,072 | ) |
| | (a) | Included zero and $(380) million recorded in discontinued operations in the three months ended June 30, 2017 and 2016 and $59 million and $(1,072) million recorded in discontinued operations in the six months ended June 30, 2017 and 2016, respectively. |
Economic Hedges - These derivatives are not designated as hedges from an accounting standpoint (and therefore we do not apply hedge accounting to the relationship) but otherwise serve the same economic purpose as other hedging arrangements. We use economic hedges when we have exposures to currency exchange risk for which we are unable to meet the requirements for hedge accounting or when changes in the carrying amount of the hedged item are already recorded in earnings in the same period as the derivative making hedge accounting unnecessary. Even though the derivative is an effective economic hedge, there may be a net effect on earnings in each period due to differences in the timing of earnings recognition between the derivative and the hedged item.
| | | | | | | | | | | | | | FINANCIAL STATEMENT EFFECTS - ECONOMIC HEDGES | | | | | | Three months ended June 30 | Six months ended June 30 | (In millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| | | | | | Balance sheet changes | | | | | Change in fair value of economic hedge increase (decrease) | $ | 979 |
| $ | 157 |
| $ | 641 |
| $ | (122 | ) | Change in carrying amount of item being hedged increase (decrease) | (1,180 | ) | (286 | ) | (956 | ) | (198 | ) | | | | | | Earnings (loss) effect of economic hedges(a) | (200 | ) | (130 | ) | (315 | ) | (321 | ) |
| | (a) | Offset by the future earnings effects of economically hedged item. |
NOTIONAL AMOUNT OF DERIVATIVES
The notional amount of a derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). The notional amount is used to compute interest or other payment streams to be made under the contract and is a measure of our level of activity. We generally disclose derivative notional amounts on a gross basis. A substantial majority of the outstanding notional amount of $173 billion at June 30, 2017 is related to managing interest rate and currency risk between financial assets and liabilities in our financial services business. The remaining derivative notional amount primarily relates to hedges of anticipated sales and purchases in foreign currency, commodity purchases and contractual terms in contracts that are considered embedded derivatives.
The table below provides additional information about how derivatives are reflected in our financial statements. | | | | | | | | CARRYING AMOUNTS RELATED TO DERIVATIVES | | | (In millions) | June 30, 2017 | December 31, 2016 | | | | Derivative assets | $ | 4,077 |
| $ | 5,467 |
| Derivative liabilities | (2,511 | ) | (4,883) | Accrued interest | 484 |
| 792 | Cash collateral & credit valuation adjustment | (1,599 | ) | (672) | Net Derivatives | 451 |
| 703 | Securities held as collateral | (432 | ) | (442) | Net amount | $ | 19 |
| $ | 262 |
|
EFFECTS OF DERIVATIVES ON EARNINGS
All derivatives are marked to fair value on our balance sheet, whether they are designated in a hedging relationship for accounting purposes or are used as economic hedges. | | | | | | | | | | | | | | | | | | | | | Three months ended June 30 | Six months ended June 30 | (In millions) | Effect on hedging instrument | Effect on underlying | Effect on earnings | Effect on hedging instrument | Effect on underlying | Effect on earnings | | | | | | | | 2017 | | | | | | | Cash flow hedges | $ | 34 |
| $ | (34 | ) | $ | — |
| $ | 56 |
| $ | (56 | ) | $ | — |
| Fair value hedges | (57 | ) | 2 |
| (56 | ) | (282 | ) | 164 |
| (118 | ) | Net investment hedges(a) | (487 | ) | 490 |
| 3 |
| (1,050 | ) | 1,063 |
| 13 |
| Economic hedges(b) | 979 |
| (1,180 | ) | (200 | ) | 641 |
| (956 | ) | (315 | ) | Total |
|
| $ | (253 | ) |
|
| $ | (420 | ) | | | | | | | | 2016 | | | | | | | Cash flow hedges | $ | 11 |
| $ | (12 | ) | $ | — |
| $ | (45 | ) | $ | 45 |
| $ | 1 |
| Fair value hedges | 888 |
| (933 | ) | (46 | ) | 2,610 |
| (2,688 | ) | (77 | ) | Net investment hedges(a) | (604 | ) | 609 |
| 5 |
| (2 | ) | 40 |
| 37 |
| Economic hedges(b) | 157 |
| (286 | ) | (130 | ) | (122 | ) | (198 | ) | (321 | ) | Total |
|
| $ | (171 | ) |
|
| $ | (360 | ) |
The amounts in the table above generally do not include associated derivative accruals in income or expense.
| | (a) | Both derivatives and non-derivatives hedging instruments are included. |
| | (b) | Net effect is substantially offset by the change in fair value of the hedged item that will affect earnings in future periods. |
See Note 14 for additional information about changes in shareowners' equity related to hedging and amounts released to earnings.
See Note 21 for other supplemental information about derivatives and hedging.
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