GE 2010 Annual Report Download - page 62

management’s discussion and analsis
60 GE 2010 ANNUAL REPORT
risk characteristics of the related financing receivable. Such an
estimate requires consideration of historical loss experience,
adjusted for current conditions, and judgments about the prob-
able effects of relevant observable data, including present
economic conditions such as delinquency rates, financial health
of specific customers and market sectors, collateral values
(including housing price indices as applicable), and the present
and expected future levels of interest rates. The underlying
assumptions, estimates and assessments we use to provide for
losses are updated periodically to reflect our view of current
conditions. Changes in such estimates can significantly affect
the allowance and provision for losses. It is possible that we will
experience credit losses that are different from our current
estimates. Write-offs in both our consumer and commercial
portfolios can also reflect both losses that are incurred subse-
quent to the beginning of a fiscal year and information
becoming available during that fiscal year which may identify
further deterioration on exposures existing prior to the begin-
ning of that fiscal year, and for which reserves could not have
been previously recognized. Our risk management process
includes standards and policies for reviewing major risk expo-
sures and concentrations, and evaluates relevant data either for
individual loans or financing leases, or on a portfolio basis,
as appropriate.
Further information is provided in the Global Risk Management
and Financial Resources and Liquidity—Financing Receivables
sections, the Asset Impairment section that follows and in
Notes 1, 6 and 23.
REVENUE RECOGNITION ON LONG-TERM PRODUCT SERVICES
AGREEMENTS requires estimates of profits over the multiple-year
terms of such agreements, considering factors such as the
frequency and extent of future monitoring, maintenance and
overhaul events; the amount of personnel, spare parts and other
resources required to perform the services; and future billing
rate and cost changes. We routinely review estimates under
product services agreements and regularly revise them to
adjust for changes in outlook. We also regularly assess cus-
tomer credit risk inherent in the carrying amounts of receivables
and contract costs and estimated earnings, including the risk
that contractual penalties may not be sufficient to offset our
accumulated investment in the event of customer termination.
We gain insight into future utilization and cost trends, as well as
credit risk, through our knowledge of the installed base of
equipment and the close interaction with our customers that
comes with supplying critical services and parts over extended
periods. Revisions that affect a product services agreement’s
total estimated profitability result in an adjustment of earnings;
such adjustments decreased earnings by $0.2 billion in 2010,
increased earnings by $0.2 billion in 2009 and decreased earnings
by $0.2 billion in 2008. We provide for probable losses when
they become evident.
Further information is provided in Notes 1 and 9.
ASSET IMPAIRMENT assessment involves various estimates and
assumptions as follows:
Investments. We regularly review investment securities for
impairment using both quantitative and qualitative criteria.
Effective April 1, 2009, the FASB amended ASC 320 and modified
the requirements for recognizing and measuring other-than-
temporary impairment for debt securities. If we do not intend to
sell the security and it is not more likely than not that we will be
required to sell the security before recovery of our amortized
cost, we evaluate other qualitative criteria to determine whether
a credit loss exists, such as the financial health of and specific
prospects for the issuer, including whether the issuer is in
compliance with the terms and covenants of the security. Quan-
ti tative criteria include determining whether there has been an
adverse change in expected future cash flows. For equity secu-
rities, our criteria include the length of time and magnitude of
the amount that each security is in an unrealized loss position.
Our other-than-temporary impairment reviews involve our
finance, risk and asset management functions as well as the
portfolio management and research capabilities of our internal
and third-party asset managers. See Note 1, which discusses
the determination of fair value of investment securities.
Further information about actual and potential impairment
losses is provided in the Financial Resources and Liquidity —
Investment Securities section and in Notes 1, 3 and 9.
Long-Lived Assets. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Determining
whether an impairment has occurred typically requires various
estimates and assumptions, including determining which undis-
counted cash flows are directly related to the potentially
impaired asset, the useful life over which cash flows will occur,
their amount, and the asset’s residual value, if any. In turn,
measurement of an impairment loss requires a determination of
fair value, which is based on the best information available. We
derive the required undiscounted cash flow estimates from our
historical experience and our internal business plans. To deter-
mine fair value, we use quoted market prices when available,
our internal cash flow estimates discounted at an appropriate
interest rate and independent appraisals, as appropriate.
Our operating lease portfolio of commercial aircraft is a sig-
nificant concentration of assets in GE Capital, and is particularly
subject to market fluctuations. Therefore, we test recoverability of
each aircraft in our operating lease portfolio at least annually.
Additionally, we perform quarterly evaluations in circumstances
such as when aircraft are re-leased, current lease terms have
changed or a specific lessee’s credit standing changes. We con-
sider market conditions, such as global demand for commercial
aircraft. Estimates of future rentals and residual values are based
on historical experience and information received routinely from
independent appraisers. Estimated cash flows from future leases
are reduced for expected downtime between leases and for
estimated technical costs required to prepare aircraft to be