GE 2005 Annual Report Download - page 28

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2007 Restatement
As discussed in the explanatory note to this Form 10-K/A and in note 1 to our financial statements, we are restating
financial statements and other financial information for the years 2005, 2004 and 2003, and financial information for
the years 2002 and 2001, and for each of the quarters in the years 2005 and 2004. The restatement adjusts our
accounting for interest rate swap transactions related to a portion of the commercial paper issued by General Electric
Capital Corporation (GECC) and General Electric Capital Services, Inc. (GECS), each wholly-owned subsidiaries of
GE, from January 1, 2001, the date we adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. The restatement has no effect on our
cash flows or liquidity, and its effects on our financial position at the ends of the respective restated periods are
immaterial.
Interest rate swaps – agreements under which we pay a fixed rate of interest and receive a floating rate of
interest on an agreed notional amount – are used in meeting our objective of managing interest rate risk related to
our commercial paper program. Many of our financial assets – such as loans and leases – have long-term, fixed-rate
yields, and funding them with proceeds of commercial paper would expose us to interest rate risk. Interest rate
swaps are used to manage this risk. We use commercial paper in connection with interest rate swaps because that
financing structure is highly effective at fixing interest rates, enabling us to match fixed rate assets with fixed rate
funding (or “match funding”) provided by the hedged commercial paper. Consistent with our hedge documentation,
we had measured and recognized hedge ineffectiveness each reporting period. We had never used the short-cut
treatment provided for in SFAS 133 for any of these hedges.
The following table sets forth the effects of the error in accounting for interest rate swaps related to our
commercial paper hedging program, more fully described beginning on page 3, on our previously reported earnings
for the years 2001 through 2005, and each of the quarters in the years 2004 and 2005.
Increase (decrease) in
earnings from continuing operations
before accounting changes
(In millions) 2005 2004 2003 2002 2001
Total adjustment $ 358 $ 341 $ 325 $ (1,169) $ (328)
Previously reported earnings from continuing
operations before accounting changes $ 18,275 $ 16,285 $ 13,766 $ 15,798 $ 12,948
Percent variation from previously reported
earnings from continuing operations
before accounting changes 2.0% 2.1% 2.4% (7.4)% (2.5)%