NOTE 19. 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 values 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.



	2017				2016
December 31 (In millions)	Carrying amount (net)		Estimated fair value		Carrying amount (net)		Estimated fair value

GE
Assets
Investments and notes receivable	$	1,341	$	1,418	$	1,526	$	1,595
Liabilities
Borrowings(a)(b)	34,473		35,416		19,184		19,923
Borrowings (debt assumed)(a)(c)	47,114		53,502		60,109		66,998

GE Capital
Assets
Loans	17,363		17,331		21,060		20,830
Other commercial mortgages	1,489		1,566		1,410		1,472
Loans held for sale	3,274		3,274		473		473
Other financial instruments(d)	112		147		121		150
Liabilities
Borrowings(a)(e)(f)(g)	55,353		60,415		58,523		62,024
Investment contracts	2,569		2,996		2,813		3,277


(a)	See Note 10.


(b)	Included $217 million and $115 million of accrued interest in estimated fair value at December 31, 2017 and December 31, 2016, respectively.


(c)	Included $696 million and $803 million of accrued interest in estimated fair value at December 31, 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 December 31, 2017 and December 31, 2016 would have been reduced by $1,754 million and $2,397 million, respectively.


(f)	Included $731 million and $775 million of accrued interest in estimated fair value at December 31, 2017 and December 31, 2016, respectively.


(g)	Excluded $39,844 million and $58,780 million of net intercompany payable to GE at December 31, 2017 and December 31, 2016, respectively.

A description of how we estimate fair values follows:

Loans. Based on a discounted future cash flows methodology, using current market interest rate data adjusted for inherent credit risk or quoted market prices and recent transactions, if available.

Borrowings. Based on valuation methodologies using current market interest rate data that are comparable to market quotes adjusted for our non-performance risk or quoted market prices and recent transactions, if available.

Investment contracts. Based on expected future cash flows, discounted at currently offered rates for immediate annuity contracts or the income approach for single premium deferred annuities.

All other instruments. Based on observable market transactions and/or valuation methodologies using current market interest rate data adjusted for inherent credit risk.

Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the above disclosures; such items include cash and equivalents, investment securities and derivative financial instruments.

Additional information about notional amounts of loan commitments follows.



NOTIONAL AMOUNTS OF LOAN COMMITMENTS

December 31 (In millions)	2017		2016

Ordinary course of business lending commitments(a)	$	1,105	$	687
Unused revolving credit lines	198		238


(a)	Excluded investment commitments of $677 million and $522 million at December 31, 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.

Under hedge accounting, the derivative carrying amount is measured at fair value each period and any resulting gain or loss is recorded in a separate component of shareowners’ equity. Differences between the derivative and the hedged item may cause changes in their fair values to not offset completely, which is referred to as ineffectiveness. When the hedged transaction occurs, these amounts are released from shareowners’ equity, in order that the transaction will be reflected in earnings at the rate locked in by the derivative. The effect of the hedge is reported in the same financial statement line item as the earnings effects of the hedged transaction.

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.

The following table explains the effect of changes in market rates on the fair value of derivatives we use most commonly in cash flow hedging arrangements.



Interest rate forwards/swaps	Interest rate increases	Interest rate decreases
Pay fixed rate/receive floating rate	Fair value increases	Fair value decreases

Currency forwards/swaps	U.S. dollar strengthens	U.S. dollar weakens
Pay U.S. dollars/receive foreign currency	Fair value decreases	Fair value increases

Commodity derivatives	Price increases	Price decreases
Receive commodity/ pay fixed price	Fair value increases	Fair value decreases

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.

Under hedge accounting, the derivative is measured at fair value and the carrying amount of the hedged debt is adjusted for the change in value related to the exposure being hedged, with both adjustments offset to earnings as interest expense. For example, the earnings effect of an increase in the fair value of the derivative will be largely offset by the earnings effect of an increase in the carrying amount of the hedged debt. Differences between the terms of the derivative and the hedged debt may cause changes in their fair values to not offset completely, which is referred to as ineffectiveness.

The effect of changes in market interest rates on the fair value of derivatives we use most commonly in fair value hedging arrangements is presented below.



Interest rate forwards/swaps	Interest rate increases	Interest rate decreases
Pay floating rate/receive fixed rate	Fair value decreases	Fair value increases

Net investment hedges – We invest in foreign operations that conduct their financial services activities in currencies other than the U.S. dollar. We hedge the currency risk associated with those investments primarily using non-derivative instruments such as debt denominated in a foreign currency and short-term currency exchange contracts under which we receive U.S. dollars and pay foreign currency.

Under hedge accounting, the portion of the fair value change of the derivative or debt instrument that relates to changes in spot currency exchange rates is offset in a separate component of shareowners’ equity. For example, an increase in the fair value of the derivative related to changes in spot exchange rates will be offset by a corresponding increase in the currency translation component of shareowners’ equity. The portion of the fair value change of the derivative related to differences between spot and forward rates, which primarily relates to the interest component, is recorded in earnings each period as interest expense. As a result of this hedging strategy, the investments in foreign operations of our financial services business are largely unaffected by changes in currency exchange rates. The amounts recorded in shareowners’ equity only affect earnings if the hedged investment is sold, substantially liquidated, or control is lost.

The effect of changes in currency exchange rates on the fair value of derivatives we use in net investment hedging arrangements is presented below.



Currency forwards/swaps	U.S. dollar strengthens	U.S. dollar weakens
Receive U.S. dollars/pay foreign currency	Fair value increases	Fair value decreases

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.

These derivatives are marked to fair value through earnings each period. For our financial services business, these gains and losses are reported in “GE Capital revenues from services”. For our industrial businesses, the effects are reported in “Other income” or “Other costs and expenses”. The offsetting earnings effects associated with hedged assets and liabilities are also displayed in the table below. In general, the earnings effects of the hedged item are recorded in the same financial statement line as the derivative. The earnings effect of economic hedges, after considering offsets related to earnings effects of hedged assets and liabilities, is substantially offset by changes in the fair value of forecasted transactions that have not yet affected earnings.

The table below explains the effects of market rate changes on the fair value of derivatives we use most commonly as economic hedges.



Interest rate forwards/swaps interest rate	Interest rate increases	Interest rate decreases
Pay floating rate/receive fixed rate	Fair value decreases	Fair value increases

Currency forwards/swaps	U.S. dollar strengthens	U.S. dollar weakens
Pay U.S. dollars/receive foreign currency	Fair value decreases	Fair value increases
Receive U.S. dollars/pay foreign currency	Fair value increases	Fair value decreases

Commodity derivatives	Price increases	Price decreases
Receive commodity/ pay fixed price	Fair value increases	Fair value decreases

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. The majority of the outstanding notional amount of $187 billion at December 31, 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. Derivative assets and liabilities are recorded at fair value exclusive of interest earned or owed on interest rate derivatives, which is presented separately on our Statement of Financial Position. Cash collateral and securities held as collateral represent assets that have been provided by our derivative counterparties as security for amounts they owe us (derivatives that are in an asset position).



FAIR VALUE OF DERIVATIVES

	2017						2016
December 31 (in millions)	Assets			Liabilities			Assets			Liabilities

Derivatives accounted for as hedges
Interest rate contracts	$	1,862		$	148		$	3,106		$	210
Currency exchange contracts	160			70			402			624
Other contracts	—			—			—			—
	$	2,021		$	218		$	3,508		$	834

Derivatives not accounted for as hedges
Interest rate contracts	93			8			62			20
Currency exchange contracts	1,111			2,043			1,778			4,011
Other contracts	139			91			119			17
	$	1,343		$	2,143		$	1,958		$	4,048

Gross derivatives recognized in statement of financial position
Gross derivatives	3,364			2,361			5,467			4,883
Gross accrued interest	469			(38		)	768			(24		)
	$	3,833		$	2,323		$	6,234		$	4,859

Amounts offset in statement of financial position
Netting adjustments(a)	(1,457		)	(1,456		)	(3,097		)	(3,094		)
Cash collateral(b)	(1,529		)	(578		)	(2,025		)	(1,355		)
	$	(2,986	)	$	(2,034	)	$	(5,121	)	$	(4,449	)

Net derivatives recognized in statement of financial position
Net derivatives	847			289			1,113			410

Amounts not offset in statement of financial position
Securities held as collateral(c)	(405		)	—			(442		)	—

Net amount	$	441		$	289		$	671		$	410

Derivatives are classified in the captions “All other assets” and “All other liabilities” and the related accrued interest is classified in “Other GE Capital receivables” and “All other liabilities” in our Statement of Financial Position.


(a)	The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts include fair value adjustments related to our own and counterparty non-performance risk. At December 31, 2017 and December 31, 2016, the cumulative adjustment for non-performance risk was $(1) million and $(3) million, respectively.


(b)	Excluded excess cash collateral received and posted of $10 million and $255 million at December 31, 2017, respectively, and $6 million and $177 million at December 31, 2016, respectively.


(c)	Excluded excess securities collateral received of $16 million and zero at December 31, 2017 and December 31, 2016, 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. As discussed in the previous sections, each type of hedge affects the financial statements differently. In fair value and economic hedges, both the hedged item and the hedging derivative largely offset in earnings each period. In cash flow and net investment hedges, the effective portion of the hedging derivative is offset in separate components of shareowners’ equity and ineffectiveness is recognized in earnings. The table below summarizes these offsets and the net effect on pre-tax earnings.



(In millions)	Effect on hedging instrument			Effect on underlying			Effect on earnings(a)

2017
Cash flow hedges	$	199		$	(199	)	$	—
Fair value hedges	(556		)	371			(185		)
Net investment hedges(b)	(1,833		)	1,852			19
Economic hedges(c)	1,147			(1,683		)	(536		)
Total							$	(702	)



2016
Cash flow hedges	$	(274	)	$	274		$	1
Fair value hedges	170			(433		)	(263		)
Net investment hedges(b)	2,458			(2,376		)	82
Economic hedges(c)	(2,132		)	1,784			(348		)
Total							$	(528	)

The amounts in the table above generally do not include associated derivative accruals in income or expense.


(a)	For cash flow and fair value hedges, the effect on earnings is primarily related to ineffectiveness. For net investment hedges, the effect on earnings is related to ineffectiveness and spot-forward differences.

(b)

Both non-derivatives and derivatives hedging instruments are included. The carrying value of non-derivative instruments designated as net investment hedges was $(13,028) million and $(13,355) million at December 31, 2017 and December 31, 2016, respectively. Total pre-tax reclassifications from CTA to gain (loss) was $125 million and $(528) million in 2017 and 2016, respectively. Total pre-tax reclassifications from CTA to gain (loss) included $125 million and $(529) million recorded in discontinued operations in 2017 and 2016, respectively.


(c)	Net effect is substantially offset by the change in fair value of the hedged item that will affect earnings in future periods.

Changes in the fair value of cash flow hedges are recorded in a separate component of equity (referred to below as Accumulated Other Comprehensive Income, or AOCI) and are recorded in earnings in the period in which the hedged transaction occurs. The table below summarizes this activity by hedging instrument.



CASH FLOW HEDGE ACTIVITY

	Gain (loss) recognized in AOCI								Gain (loss) reclassified from AOCI into earnings
(In millions)	2017		2016			2015			2017			2016			2015

Interest rate contracts	$	4	$	6		$	(1	)	$	(27	)	$	(79	)	$	(130	)
Currency exchange contracts	195		(281		)	(907		)	176			(282		)	(784		)
Commodity contracts	—		—			(5		)	—			(2		)	(4		)
Total(a)	$	199	$	(274	)	$	(913	)	$	149		$	(364	)	$	(918	)


(a)	Gain (loss) is recorded in “GE Capital revenues from services”, “Interest and other financial charges”, and “Other costs and expenses” in our Statement of Earnings (Loss) when reclassified.

The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $98 million gain at December 31, 2017. We expect to transfer $30 million loss to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In all the twelve months ended 2017, 2016 and 2015, 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 December 31, 2017, 2016 and 2015, the maximum term of derivative instruments that hedge forecasted transactions was 15 years, 16 years and 17 years, respectively.

For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness were insignificant for each reporting period.

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.

As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasury securities) when our receivables due from the counterparties, measured at current market value, exceeds specified limits. The fair value of such collateral was $1,935 million at December 31, 2017, of which $1,529 million was cash and $405 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of cash collateral posted was $578 million at December 31, 2017. At December 31, 2017, our exposure to counterparties (including accrued interest), net of collateral we hold, was $361 million. This excludes exposures related to embedded derivatives.

Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the long-term credit rating of the counterparty were to fall below A-/A3 or other ratings levels agreed upon with the counterparty. In certain of these master agreements, each party also has the ability to require termination if the short-term rating of the counterparty were to fall below A-1/P-1. Our master agreements also typically contain provisions that provide termination rights upon the occurrence of certain other events, such as a bankruptcy or events of default by one of the parties. If an agreement was terminated under any of these circumstances, the termination amount payable would be determined on a net basis and could also take into account any collateral posted. The net amount of our derivative liability, after consideration of collateral posted by us and outstanding interest payments was $213 million at December 31, 2017. This excludes exposure related to embedded derivatives.