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FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2018
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. The table excludes finance leases, equity investments without readily determinable fair value 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, 2018
 
December 31, 2017
(In millions)
Carrying
amount
(net)

Estimated
fair value

 
Carrying
amount
(net)

Estimated
fair value




 


GE


 


Assets


 


Notes receivable
$
680

$
680

 
$
700

$
700

Liabilities


 


Borrowings(a)(b)
33,460

32,905

 
34,473

35,416

Borrowings (debt assumed)(a)(c)
37,499

41,339

 
47,114

53,502




 


GE Capital


 


Assets


 


Loans
13,345

13,319

 
17,363

17,331

Other commercial mortgages
1,615

1,662

 
1,489

1,566

Loans held for sale
3,217

3,219

 
3,274

3,274

Liabilities


 


Borrowings(a)(d)(e)(f)
47,121

49,538

 
55,353

60,415

Investment contracts
2,482

2,769

 
2,569

2,996

(a)
See Note 11.
(b)
Included $130 million and $217 million of accrued interest in estimated fair value at June 30, 2018 and December 31, 2017, respectively.
(c)
Included $650 million and $696 million of accrued interest in estimated fair value at June 30, 2018 and December 31, 2017, respectively.
(d)
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, 2018 and December 31, 2017 would have been reduced by $1,255 million and $1,754 million, respectively.
(e)
Included $485 million and $731 million of accrued interest in estimated fair value at June 30, 2018 and December 31, 2017, respectively.
(f)
Excluded $29,309 million and $39,844 million of net intercompany payable to GE at June 30, 2018 and December 31, 2017, respectively.

NOTIONAL AMOUNTS OF LOAN COMMITMENTS
 
 
 
 
 
(In millions)
June 30, 2018

December 31, 2017

 
 
 
Ordinary course of business lending commitments(a)
$
1,052

$
1,105

Unused revolving credit lines
149

198

(a)
Excluded investment commitments of $731 million and $677 million at June 30, 2018 and December 31, 2017, 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.

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.

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.

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.

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 $147 billion at June 30, 2018 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
 
 
 
 
 
 
 
 
June 30, 2018
 
December 31, 2017
(In millions)
Assets

Liabilities

 
Assets

Liabilities

 
 
 
 
 
 
Derivatives accounted for as hedges
 
 
 
 
 
Interest rate contracts
$
1,452

$
267

 
$
1,862

$
148

Currency exchange contracts
181

93

 
160

70

 
1,632

360

 
2,021

218

 
 
 
 
 
 
Derivatives not accounted for as hedges
 
 
 
 
 
Interest rate contracts
37

2

 
93

8

Currency exchange contracts
1,514

2,864

 
1,111

2,043

Other contracts
74

108

 
139

91

 
1,625

2,975

 
1,343

2,143

 
 
 
 
 
 
Gross derivatives recognized in statement of financial position
 
 
 
 
 
Gross derivatives
3,257

3,334

 
3,364

2,361

Gross accrued interest
273

(12
)
 
469

(38
)
 
3,530

3,322

 
3,833

2,323

 
 
 
 
 
 
Amounts offset in statement of financial position
 
 
 
 
 
Netting adjustments(a)
(2,044
)
(2,043
)
 
(1,457
)
(1,456
)
Cash collateral(b)
(955
)
(763
)
 
(1,529
)
(578
)
 
(2,999
)
(2,807
)
 
(2,986
)
(2,034
)
 
 
 
 
 
 
Net derivatives recognized in statement of financial position
 
 
 
 
 
Net derivatives
530

515

 
847

289

 
 
 
 
 
 
Amounts not offset in statement of financial position
 
 
 
 
 
Securities held as collateral(c)
(102
)
—

 
(405
)
—

 
 
 
 
 
 
Net amount
$
429

$
515

 
$
441

$
289



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 June 30, 2018 and December 31, 2017, the cumulative adjustment for non-performance risk was $(1) million and $(1) million, respectively.
(b)
Excluded excess cash collateral received and posted of $218 million and $425 million at June 30, 2018, respectively, and $10 million and $255 million at December 31, 2017, respectively. Excess cash collateral posted includes initial margin for cleared trades.
(c)
Excluded excess securities collateral received of $7 million and $16 million at June 30, 2018 and December 31, 2017, 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.
 
Three months ended June 30
Six months ended June 30
(In millions)
Effect on hedging instrument
Effect on
underlying
Effect on
earnings (a)
Effect on
hedging instrument
Effect on
underlying
Effect on
earnings
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
Cash flow hedges
$
(161
)
$
162

$
—

$
(19
)
$
20

$
1

Fair value hedges
(225
)
195

(30
)
(922
)
866

(56
)
Net investment hedges(b)
816

(810
)
6

213

(205
)
8

Economic hedges(c)
(1,248
)
1,244

(3
)
(783
)
670

(113
)
Total


$
(27
)


$
(160
)
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
Cash flow hedges
$
34

$
(34
)
$
—

$
56

$
(56
)
$
—

Fair value hedges
(57
)
2

(56
)
(282
)
164

(118
)
Net investment hedges(b)
(487
)
490

3

(1,050
)
1,063

13

Economic hedges(c)
979

(1,180
)
(200
)
641

(956
)
(315
)
Total


$
(253
)


$
(420
)

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 $(20,750) million and $(24,232) million at June 30, 2018 and 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) was zero and $59 million at June 30, 2018 and 2017, respectively. Total pre-tax reclassifications from CTA to gain (loss) included zero and $59 million recorded in discontinued operations at June 30, 2018 and 2017, 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

for the three months ended June 30

for the three months ended June 30
(In millions)
2018

2017

2016


2018

2017

2016




 




 
Interest rate contracts
$
(3
)
$
3

$
12


$
(4
)
$
(6
)
$
(26
)
Currency exchange contracts
(158
)
32

1


(68
)
71

40

Commodity contracts
—

(2
)
(1
)

—

—

(1
)
Total(a)
$
(162
)
$
34

$
12


$
(72
)
$
65

$
14

 
 
 
 
 
 
 
 
CASH FLOW HEDGE ACTIVITY
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
Gain (loss) reclassified
from AOCI into earnings
 
for the six months ended June 30
 
for the six months ended June 30
(In millions)
2018

2017

2016

 
2018

2017

2016

 
 
 
 
 
 
 
 
Interest rate contracts
$
(7
)
$
2

$
31

 
$
(6
)
$
(15
)
$
(55
)
Currency exchange contracts
(13
)
54

(77)
 
(1
)
79

(13
)
Commodity contracts
—

—

—

 
—

—

(3
)
Total(a)
$
(20
)
$
56

$
(45
)
 
$
(7
)
$
64

$
(71
)
(a)
Gain (loss) is recorded in "GE Capital revenues from services", "Interest and other financial charges", "Sales of goods", "Cost of goods sold" and "Other costs and expenses" in our Statement of Earnings when reclassified.
The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $80 million gain at June 30, 2018. We expect to transfer $61 million loss to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In the six months ended June 30, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, the maximum term of derivative instruments that hedge forecasted transactions was 14 years, 15 years and 16 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 $1,057 million at June 30, 2018, of which $955 million was cash and $102 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 $763 million at June 30, 2018. At June 30, 2018, our exposures to counterparties (including accrued interest), net of collateral we hold, was $358 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 $463 million at June 30, 2018. This excludes exposure related to embedded derivatives.