GE 2006 Annual Report Download - page 53

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we closed two significant issues: the 1997 tax-free exchange of
the Lockheed Martin convertible preferred stock we received on
the disposition of our Aerospace business in 1993, and a 1998
tax loss on the sale of a Puerto Rican subsidiary. The tax portion
of these settlements is included in the line “IRS settlements of
Lockheed Martin tax-free exchange/Puerto Rico subsidiary loss”
in note 8. The tax benefits associated with the NBC Universal
combination are included in the line “All other — net” in note 8.
GECS effective tax rate was 11.6% in 2006, compared with
11.9% in 2005 and 17.4% in 2004. The 2006 GECS rate was
about the same as 2005 as growth in lower-taxed earnings from
global operations was largely offset by a smaller benefi t on the
reorganization, discussed below, of our aircraft leasing business.
The increased benefits from lower-taxed earnings from global
operations (2.4 percentage points) and the lower benefi ts from
the reorganization of our aircraft leasing business (1.9 percentage
points) are included in the line “Tax on global activities including
exports” in note 8.
The 2005 GECS rate reflects the net benefits, discussed below,
of a reorganization of our aircraft leasing business and an increase
in lower-taxed earnings from global operations. Together, these
items more than account for the 7.2 percentage point decrease
in rate from 2004 reflected in the line “Tax on global activities
including exports” in note 8. Partially offsetting these benefi ts was
the nonrecurrence of the benefits from 2004 favorable settlements
with the IRS and the low-taxed disposition of a majority interest
in Genpact. The lack of counterparts to these items increased
the 2005 GECS tax rate by 1.7 percentage points. The favorable
settlements with the IRS are included in the line “All other — net”
and the benefit of the low-taxed disposition of a majority interest
in Genpact is included in the line “Tax on global activities including
exports” in note 8.
As a result of the repeal of the extraterritorial income (ETI)
taxing regime as part of the American Jobs Creation Act of 2004
(the Act), our aircraft leasing business no longer qualifies for a
reduced U.S. tax rate. However, the Act also extended to aircraft
leasing, the U.S. tax deferral benefits that were already available
to other GE non-U.S. active operations. These legislative changes,
coupled with a reorganization of our aircraft leasing business
and a favorable Irish tax ruling, decreased the GECS effective
tax rate 1.1 percentage points in 2006, compared with 3.0 and
1.6 percentage points in 2005 and 2004, respectively.
Global Risk Management
A disciplined approach to risk is important in a diversifi ed
organization such as ours in order to ensure that we are executing
according to our strategic objectives and that we only accept
risk for which we are adequately compensated. It is necessary
for us to manage risk at the individual transaction level, and to
consider aggregate risk at the customer, industry, geography
and collateral-type levels, where appropriate.
The GE Board of Directors oversees the risk management
process through clearly established delegation of authority.
Board and committee meeting agendas are jointly developed with
management to cover risk topics presented to our Corporate Risk
Committee, including environmental, compliance, liquidity, credit
and market risks.
The GECS Board of Directors oversees the risk management
process for financial services, and approves all signifi cant acqui-
sitions and dispositions as well as borrowings and investments.
All participants in the risk management process must comply
with approval limits established by the Board.
The GECS Chief Risk Officer is responsible, through the Corporate
Risk Function, for establishing standards for the measurement,
reporting and limiting of risk; for managing and evaluating risk
managers; for approving risk management policies; and for
reviewing major risk exposures and concentrations across the
organization. The GECS Corporate Risk Function analyzes certain
business risks and assesses them in relation to aggregate risk
appetite and approval limits set by the GECS Board of Directors.
Threshold responsibility for identifying, quantifying and miti-
gating risks is assigned to our individual businesses. We employ
proprietary analytic models to allocate capital to our fi nancing
activities, to identify the primary sources of risk and to measure
the amount of risk we will take for each product line. This approach
allows us to develop early signals that monitor changes in risk
affecting portfolio performance and actively manage the portfolio.
Other corporate functions such as Financial Planning and Analysis,
Treasury, Legal and our Corporate Audit Staff support business-
level risk management. Businesses that, for example, hedge
financial risk with derivative financial instruments must do so using
our centrally-managed Treasury function, providing assurance
that the business strategy complies with our corporate policies
and achieves economies of scale. We review risks periodically
with business-level risk managers, senior management and our
Board of Directors.
GECS employs about 18,000 dedicated risk professionals,
including 11,400 involved in collection activities and 680 special-
ized asset managers who evaluate leased asset residuals and
remarket off-lease equipment.
GE and GECS manage a variety of risks including liquidity,
credit and market risks.
• Liquidity risk is the risk of being unable to accommodate
liability maturities, fund asset growth and meet contractual
obligations through access to funding at reasonable market
rates. Additional information about our liquidity and how we
manage this risk can be found in the Financial Resources
and Liquidity section and in notes 18 and 27.
ge 2006 annual report 51