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.



	March 31, 2019				December 31, 2018
(In millions)	Carrying amount (net)		Estimated fair value		Carrying amount (net)		Estimated fair value

Assets
Loans and other receivables	$	8,345	$	8,375	$	8,812	$	8,830
Liabilities
Borrowings(a)(b)(c)	107,526		109,822		109,930		106,221
Investment contracts(d)	2,335		2,586		2,388		2,630


(a)	See Note 11.


(b)	Included $1,174 million and $1,361 million of accrued interest in estimated fair value at March 31, 2019 and December 31, 2018, respectively.


(c)	Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at March 31, 2019 and December 31, 2018 would be reduced by $1,533 million and $1,300 million, respectively.


(d)	See Note 12.

DERIVATIVES AND HEDGING

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	March 31, 2019								December 31, 2018
(In millions)	Gross Notional(a)		Assets			Liabilities			Gross Notional(a)		Assets			Liabilities

Derivatives accounted for as hedges
Interest rate contracts	$	21,830	$	1,530		$	24		$	22,904	$	1,335		$	23
Currency exchange contracts	7,128		115			110			7,970		175			121
	$	28,958	$	1,645		$	135		$	30,873	$	1,511		$	145

Derivatives not accounted for as hedges
Interest rate contracts	$	7,547	$	28		$	1		$	6,198	$	28		$	2
Currency exchange contracts	78,808		685			1,035			83,841		727			1,546
Other contracts	2,541		37			135			2,622		13			209
	$	88,896	$	750		$	1,171		$	92,662	$	769		$	1,757

Gross derivatives recognized in statement of financial position
Gross derivatives	$	117,854	$	2,395		$	1,306		$	123,535	$	2,279		$	1,902
Gross accrued interest			133			10					209			6
			$	2,528		$	1,315				$	2,489		$	1,908

Amounts offset in statement of financial position
Netting adjustments(b)			$	(828	)	$	(829	)			$	(963	)	$	(971	)
Cash collateral(c)			(1,034		)	(168		)			(1,042		)	(267		)
			$	(1,862	)	$	(997	)			$	(2,005	)	$	(1,238	)

Net derivatives recognized in statement of financial position
Net derivatives			$	666		$	318				$	483		$	670

Amounts not offset in statement of financial position
Securities held as collateral(d)			$	(326	)	$	—				$	(235	)	$	—

Net amount(e)			$	340		$	318				$	248		$	670

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)	Total gross notional at March 31, 2019 comprises $75,714 million in GE Capital and $42,139 million in GE and at December 31, 2018 comprises $79,082 million in GE Capital and $44,453 million in GE. 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.


(b)	Netting 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, which, at March 31, 2019 and December 31, 2018, was insignificant.


(c)	Excluded excess cash collateral received and posted of $41 million and $239 million at March 31, 2019, respectively, and $3 million and $439 million at December 31, 2018, respectively. Excess cash collateral posted includes initial margin for cleared trades.


(d)	Excluded excess securities collateral received of $50 million and zero at March 31, 2019 and December 31, 2018, respectively.


(e)	At March 31, 2019, our exposures to counterparties (including accrued interest), net of collateral we held, was $256 million. Counterparties' exposures to our derivative liability (including accrued interest), net of collateral posted by us, was $281 million at March 31, 2019. These exposures exclude embedded derivatives.

FAIR VALUE HEDGES

We use derivatives to hedge the effects of interest rate and currency exchange rate changes on our debt. At March 31, 2019, the cumulative amount of hedging adjustments of $3,712 million (comprising $40 million and $3,672 million on short- and long-term borrowings, respectively) was included in the carrying amount of the hedged liability of $58,885 million (comprising $9,081 million and $49,804 million of short- and long-term borrowings, respectively). The cumulative amount of hedging adjustments on discontinued hedging relationships was $18 million and $2,667 million for short- and long-term borrowings, respectively.

CASH FLOW HEDGES

Changes in the fair value of cash flow hedges are recorded in 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.



	Gain (loss) recognized in AOCI					Gain (loss) reclassified from AOCI into earnings
	for the three months ended March 31					for the three months ended March 31
(In millions)	2019		2018			2019			2018

Interest rate contracts	$	4	$	(4	)	$	(3	)	$	(2	)
Currency exchange contracts	43		146			3			66
Total	$	47	$	142		$	—		$	65

The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was a $67 million gain at March 31, 2019. We expect to reclassify $54 million of loss to earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. For the three months ended March 31, 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 March 31, 2019 and 2018, the maximum term of derivative instruments that hedge forecasted transactions was 14 years and 15 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.

For the three months ended March 31, 2019, the total loss recognized in AOCI on hedging instruments was $(68) million, comprising $(27) million on currency exchange contracts and $(41) million on foreign currency debt. For the three months ended March 31, 2018, the total loss recognized in AOCI on hedging instruments was $(605) million, comprising $(9) million on currency exchange contracts and $(596) million on foreign currency debt. The carrying value of foreign currency debt designated as net investment hedges was $12,502 million and $13,627 million at March 31, 2019 and 2018, respectively.

The total reclassified from AOCI into earnings from continuing and discontinued operations was insignificant for the three months ended March 31, 2019 and 2018 respectively.

Amount of gain (loss) recognized in earnings on derivative amount excluded from effectiveness was insignificant for the three months ended March 31, 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.

The following table summarizes the effect of fair value and cash flow hedges on earnings and the location.



	Three months ended March 31, 2019														Three months ended March 31, 2018
(In millions)	Sales			Cost of sales			Interest and other financial charges			SG&A			Revenues from financial services		Sales		Cost of sales		Interest and other financial charges			SG&A		Revenues from financial services

Total amounts of line items presented in the Consolidated Statement of Earnings (Loss) in which the effects are recorded	$	25,342		$	20,353		$	1,133		$	4,146		$	1,944	$	26,002	$	20,911	$	1,282		$	4,088	$	1,786
Cash Flow Hedges
Interest rate contracts
Gain/(loss) reclassified from AOCI into income	$	—		$	—		$	(6	)	$	—		$	3					$	(5	)			$	3
Currency exchange contracts
Gain/(loss) reclassified from AOCI into income	(1		)	(9		)	(4		)	(1		)	17		4		6		(5		)			61
Total effect of cash flow hedges	$	(1	)	$	(9	)	$	(10	)	$	(1	)	$	21	$	4	$	6	$	(10	)			$	64

Fair Value Hedges
Interest rate contracts
Hedged items							$	(527	)															$	672
Derivatives designated as hedging instruments							515																	(697		)
Total effect of fair value hedges							$	(11	)															$	(26	)

The following table summarizes the effect of derivatives not designated as hedges on earnings and the location.



	Three months ended March 31, 2019													Three months ended March 31, 2018
(In millions)	Revenues from financial services			Cost of sales		Interest and other financial charges			SG&A			Other Income		Revenues from financial services			Cost of sales		Interest and other financial charges			SG&A			Other Income

Interest rate contracts	$	(20	)	$	—	$	—		$	—		$	—	$	(14	)	$	—	$	—		$	—		$	—
Currency exchange contracts	453			8		(63		)	(45		)	3		653			7		(69		)	(130		)	51
Other	—			—		96			—			14		(5		)			(35		)				9
Total(a)	$	433		$	8	$	33		$	(45	)	$	17	$	634		$	7	$	(104	)	$	(130	)	$	60


(a)	Substantially all of the gain or loss recognized in earnings is offset by either the current period change in value of the item being hedged which is recorded in earnings in the current period or a future period for hedges of future exposures.

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.

Additionally, our master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the credit rating of the counterparty were to fall below specified ratings levels agreed upon with the counterparty, primarily BBB/Baa2. 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.