Annual Report - CoBank

If we determine that a derivative no longer qualifies as aneffective fair value or cash flow hedge, or if managementremoves the hedge designation, we continue to carry thederivative on the balance sheet at fair value, with changes infair value recognized in current period earnings as part ofnoninterest income. For discontinued cash flow hedges, weamortize the component of other comprehensive income (loss)to net interest income over the original term of the hedgecontract. For additional information, refer to Note 11.Fair Value MeasurementsOur fair value measurements represent the estimatedamount to be received to sell an asset or paid to transfer orextinguish a liability (an exit price) in active markets amongwilling participants at the reporting date. We maximize the useof observable inputs and minimize the use of unobservableinputs when measuring fair value. The classification of assetsand liabilities measured at fair value within the disclosurehierarchy is based on the three levels of inputs to the fair valuemeasurement process. For additional information, refer toNote 12.Fair Value of Guarantor’s ObligationsWe provide standby letters of credit, which areirrevocable undertakings to guarantee payment of a specifiedfinancial obligation. As a guarantor, we recognize a liabilityfor the fair value of the obligation undertaken in issuing theguarantee. Our liability for the fair value of these obligationsis determined by applying a risk-adjusted spread percentage tothose obligations.Employee Benefit PlansOur employee benefit plans are described in Note 8. Thenet expense for employee benefit plans is recorded asemployee compensation expense. For defined benefit pensionplans, we use the “Projected Unit Credit” actuarial method forfinancial reporting and funding purposes.The anticipated costs of benefits related to postretirementhealth care and life insurance are accrued during the period ofthe employees’ active service and are classified as employeecompensation expense.Income TaxesWe operate as a non-exempt cooperative, which qualifiesfor tax treatment under Subchapter T of the Internal RevenueCode. Accordingly, amounts distributed as qualified patronagedistributions to borrowers in the form of cash or stock may bededucted from taxable income. We base provisions for incometaxes for financial reporting purposes only on those taxableearnings that will not be distributed as qualified patronagedistributions.We record deferred tax assets and liabilities for temporarydifferences between the financial statement carrying amountsof existing assets and liabilities and their respective tax bases.We measure these deferred amounts using the currentmarginal statutory tax rate on the taxable portion of ourbusiness activities. Calculating deferred tax assets andliabilities involves various management estimates andassumptions as to future taxable earnings. We expect to fullyrealize deferred tax assets based on the projected level offuture taxable income.See Note 9 for further information regarding incometaxes.CoBank 2011 Annual Report72