GE 2005 Annual Report Download - page 29

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(29)
(In millions) Increase (decrease) in earnings from continuing operations(a)
2005 2004
Quarter 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
Total adjustment $ 99 $ 173 $ (139) $ 225 $ 105 $ (224) $ 596 $ (136)
Previously reported
earnings from continuing
operations $ 5,772 $ 4,569 $ 4,372 $ 3,562 $ 5,718 $ 3,941 $ 3,658 $ 2,968
Percent variation from
previously reported
earnings from continuing
operations 1.7% 3.8% (3.2)% 6.3% 1.8% (5.7)% 16.3 % (4.6)%
(a) See also note 30 to the Notes to Consolidated Financial Statements – Quarterly Information (Unaudited), as restated
Changes to our previously reported earnings detailed above reflect the volatility resulting from recognizing changes
in the fair value of our commercial paper interest rate swaps immediately in earnings, rather than recording them in
earnings over the remaining term of the hedging relationship. Values of these swaps move directly with changes in
interest rates: increases in interest rates produce positive earnings effects from fair value gains on the interest rate
swaps, as the amount of cash we receive on the swaps’ variable cash flow stream increases versus its fixed payment
stream; similarly, negative earnings effects result from fair value losses on the swaps associated with decreases in
interest rates as the amount of cash received on the swaps’ variable cash flow stream decreases versus its fixed
payment stream. Interest rates generally trended downward during the period from 2001 to the present, explaining
the slightly negative effect on earnings from this accounting error correction. However, interest rates were volatile
within the years – for example increasing sharply in the second quarter of 2004 and first quarter of 2005, resulting in
more pronounced positive earnings effects in those periods. As these swaps are used in match funding arrangements,
which protect against the economic exposure to changes in interest rates, there are offsetting fair value changes
associated with the related fixed rate assets. Because fair value changes related to fixed rate assets are not
recognized in earnings under the current accounting model, the elimination of hedge accounting through correction
of the error presents the current earnings effects of only one of two equal and offsetting components of the economic
relationship.
The effects of these corrections resulted in a cumulative earnings decrease of $0.5 billion through
December 31, 2005, all of which were related to interest rate swaps used in our commercial paper hedging program.
Reversal of these cumulative adjustments will affect net earnings positively over the terms of the underlying interest
rate swaps, but to a degree that we do not expect to be significant in any individual period given the terms of the
arrangements and actions taken to eliminate the accounting volatility by modifying the documentation in a manner
that will enable the swaps to qualify for hedge accounting effective January 1, 2007.
Operations
Our consolidated financial statements combine the industrial manufacturing, services and media businesses of
General Electric Company (GE) with the financial services businesses of General Electric Capital Services, Inc.
(GECS or financial services).