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FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
FINANCIAL INSTRUMENTS
NOTE 17. FINANCIAL INSTRUMENTS
The following table provides information about assets and liabilities not carried at fair value and excludes finance leases, equity securities without readily determinable fair value and non-financial assets and liabilities. Substantially all of these assets are considered to be Level 3 and the vast majority of our liabilities’ fair value are considered Level 2.

June 30, 2019
 
December 31, 2018
(In millions)
Carrying
amount
(net)

Estimated
fair value

 
Carrying
amount
(net)

Estimated
fair value




 


Assets


 


Loans and other receivables
$
8,292

$
8,358

 
$
8,812

$
8,830

Liabilities


 


Borrowings (Note 11)
105,778

110,233

 
109,930

106,221

Investment contracts (Note 12)
2,298

2,656

 
2,388

2,630


Unlike the carrying amount, estimated fair value of borrowings included $1,140 million and $1,361 million of accrued interest at
June 30, 2019 and December 31, 2018, respectively, and excluded the impact of derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at June 30, 2019 and December 31, 2018 would be reduced by $1,685 million and $1,300 million, respectively. 

DERIVATIVES AND HEDGING. Our policy requires that derivatives are used solely for managing risks and not for speculative purposes. Total gross notional was $100,903 million ($60,331 million in GE Capital and $40,573 million in GE) and $123,535 million ($79,082 million in GE Capital and $44,453 million in GE) at June 30, 2019 and December 31, 2018, respectively. GE Capital notional relates primarily to managing interest rate and currency risk between financial assets and liabilities, and GE notional relates primarily to managing currency risk.
FAIR VALUE OF DERIVATIVES
June 30, 2019
 
December 31, 2018
(In millions)
Gross Notional

All other assets

All other liabilities

 
Gross Notional

All other assets

All other liabilities

 
 
 
 
 
 
 
 
Interest rate contracts
$
21,518

$
1,654

$
3

 
$
22,904

$
1,335

$
23

Currency exchange contracts
6,313

97

104

 
7,970

175

121

Derivatives accounted for as hedges
$
27,831

$
1,751

$
106

 
$
30,873

$
1,511

$
145

 
 
 
 
 
 
 
 
Interest rate contracts
$
4,934

$
46

$
12

 
$
6,198

$
28

$
2

Currency exchange contracts
65,872

555

1,093

 
83,841

727

1,546

Other contracts
2,267

57

78

 
2,622

13

209

Derivatives not accounted for as hedges
$
73,072

$
658

$
1,183

 
$
92,662

$
769

$
1,757

 
 
 
 
 
 
 
 
Gross derivatives
$
100,903

$
2,409

$
1,290

 
$
123,535

$
2,279

$
1,902

 
 
 
 
 
 
 
 
Netting and credit adjustments
 
$
(683
)
$
(684
)
 
 
$
(959
)
$
(967
)
Cash collateral adjustments
 
(1,230
)
(278
)
 
 
(1,042
)
(267
)
Net derivatives recognized in statement of financial position
 
$
495

$
327

 
 
$
279

$
669

 
 
 
 
 
 
 
 
Net accrued interest
 
$
185

$
3

 
 
$
205

$
1

Securities held as collateral
 
(460
)

 
 
(235
)

Net amount
 
$
220

$
330

 
 
$
248

$
670


Fair value of derivatives in our consolidated Statement of Financial Position excluded accrued interest. Cash collateral adjustments excluded excess collateral received and posted of $5 million and $21 million at June 30, 2019, respectively, and $3 million and $439 million at December 31, 2018, respectively. Securities held as collateral excluded excess collateral received of $22 million and zero at June 30, 2019 and December 31, 2018, respectively.

FAIR VALUE HEDGES. We use derivatives to hedge the effects of interest rate and currency exchange rate changes on our borrowings. At June 30, 2019, the cumulative amount of hedging adjustments of $4,221 million (including $2,568 million on discontinued hedging relationships) was included in the carrying amount of the hedged liability of $58,344 million. The cumulative amount of hedging adjustments was primarily recorded in long-term borrowings.

CASH FLOW HEDGES. Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income (AOCI) and recorded in earnings in the period in which the hedged transaction occurs. The gain (loss) recognized in AOCI was $(49) million and $(162) million for the three months ended June 30, 2019 and 2018, respectively, and $(2) million and $(20) million for the six months ended June 30, 2019 and 2018, respectively. The gain (loss) reclassified from AOCI to earnings was $(29) million and $(72) million for the three months ended June 30, 2019 and 2018, respectively, and $(29) million and $(7) million for the six months ended June 30, 2019 and 2018, respectively. These amounts were primarily related to currency exchange and interest rate contracts.

The total amount in AOCI related to cash flow hedges of forecasted transactions was a $49 million gain at June 30, 2019. We expect to reclassify $74 million of loss to earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. For the three months and six months ended June 30, 2019 and 2018, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At June 30, 2019 and 2018, the maximum term of derivative instruments that hedge forecasted transactions was 13 years and 14 years, respectively.

NET INVESTMENT HEDGES. For these hedges, the portion of the fair value changes of the derivatives or debt instruments that relates to changes in spot currency exchange rates is recorded in a separate component of AOCI. The portion of the fair value changes of the derivatives related to differences between spot and forward rates is recorded in earnings each period. The amounts recorded in AOCI affect earnings if the hedged investment is sold, substantially liquidated, or control is lost.

The total gain (loss) recognized in AOCI on hedging instruments for the three months ended June 30, 2019 and 2018 was $86 million and $810 million, respectively, comprising $2 million and $92 million on currency exchange contracts and $85 million and $718 million on foreign currency debt, respectively. The total gain (loss) recognized in AOCI on hedging instruments for the six months ended June 30, 2019 and 2018 was $18 million and $205 million, respectively, comprising $(25) million and $83 million on currency exchange contracts and $44 million and $123 million on foreign currency debt. The total gain (loss) excluded from assessment and recognized in earnings was $8 million and $6 million for the three months ended June 30, 2019 and 2018, respectively. The total gain (loss) excluded from assessment and recognized in earnings was $16 million and $8 million for the six months ended June 30, 2019 and 2018.

The carrying value of foreign currency debt designated as net investment hedges was $12,421 million and $9,815 million at
June 30, 2019 and 2018, respectively. The total reclassified from AOCI into earnings was insignificant for the three and six months ended June 30, 2019 and 2018, respectively.

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. For derivatives not designated as hedging instruments, substantially all of the gain or loss recognized in earnings is offset by either the current period change in value of underlying exposures which is recorded in earnings in the current period or a future period when the recording of the exposures occur.
The table below presents the effect of our derivative financial instruments in the consolidated Statement of Earnings:
 
Three months ended June 30, 2019
 
Three months ended June 30, 2018
(In millions)
Revenues
Cost of sales
Interest Expense
SG&A
Other Income
 
Revenues
Cost of sales
Interest Expense
SG&A
Other Income
 
 
 
 
 
 
 
 
 
 
 
 
Total amounts presented in the consolidated Statement of Earnings
$
28,831

$
21,817

$
991

$
4,184

$
(8
)
 
$
29,162

$
21,749

$
1,291

$
4,346

$
886

 
 
 
 
 
 
 
 
 
 
 
 
Total effect of cash flow hedges
$
(15
)
$
(5
)
$
(9
)
$

$

 
$
(72
)
$
9

$
(10
)
$

$

 
 
 
 
 
 
 
 
 
 
 
 
Hedged items
 
 
$
(659
)
 
 
 
 
 
$
195

 
 
Derivatives designated as hedging instruments
 
 
646

 
 
 
 
 
(225
)
 
 
Total effect of fair value hedges
 
 
$
(14
)
 
 
 
 
 
$
(30
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
(16
)
$

$

$

$

 
$
(20
)
$

$

$

$

Currency exchange contracts
(370
)
(52
)
(76
)
1

(33
)
 
(1,159
)
(249
)
69

130

(52
)
Other


27


(11
)
 
4


25


11

Total effect of derivatives not designated as hedges
$
(385
)
$
(52
)
$
(49
)
$
1

$
(43
)
 
$
(1,175
)
$
(249
)
$
94

$
130

$
(40
)
 
Six months ended June 30, 2019
 
Six months ended June 30, 2018
(In millions)
Revenues
Cost of sales
Interest Expense
SG&A
Other Income
 
Revenues
Cost of sales
Interest Expense
SG&A
Other Income
 
 
 
 
 
 
 
 
 
 
 
 
Total amounts presented in the consolidated Statement of Earnings
$
56,117

$
42,170

$
2,123

$
8,330

$
870

 
$
56,950

$
42,659

$
2,573

$
8,434

$
1,091

 
 
 
 
 
 
 
 
 
 
 
 
Total effect of cash flow hedges
$
5

$
(14
)
$
(19
)
$
(1
)
$

 
$
(4
)
$
16

$
(20
)
$

$

 
 
 
 
 
 
 
 
 
 
 
 
Hedged items
 
 
$
(1,186
)
 
 
 
 
 
$
866

 

Derivatives designated as hedging instruments
 
 
1,161

 
 
 
 
 
(922
)
 

Total effect of fair value hedges
 
 
$
(25
)
 
 
 
 
 
$
(56
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
(36
)
$

$

$

$

 
$
(34
)
$

$

$

$

Currency exchange contracts
83

(44
)
(139
)
(44
)
(29
)
 
(506
)
(243
)


(1
)
Other


123


3

 
(1
)

(10
)

21

Total effect of derivatives not designated as hedges
$
48

$
(44
)
$
(16
)
$
(44
)
$
(27
)
 
$
(542
)
$
(243
)
$
(10
)
$

$
19


COUNTERPARTY CREDIT RISK
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we net our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. We actively monitor these net exposures against defined limits and take appropriate actions in response, including requiring additional collateral. Our exposures to counterparties (including accrued interest), net of collateral we held, was $123 million and $148 million at June 30, 2019 and December 31, 2018, respectively. Counterparties' exposures to our derivative liability (including accrued interest), net of collateral posted by us, was $307 million and $644 million at June 30, 2019 and December 31, 2018, respectively.