GE 2007 Annual Report Download - page 61

ge 2007 annual report 59
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Further information is provided in the Financial Resources
and Liquidity — Financing Receivables section, the Asset
Impairment section that follows and in notes 1, 12 and 13.
REVENUE RECOGNITION ON LONG-TERM AGREEMENTS to provide
product services (product services agreements) requires estimates
of profi ts 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 customer credit risk inherent in the carrying amounts of
receivables and contract costs and estimated earnings, including
the risk that contractual penalties may not be suffi cient to offset
our accumulated investment in the event of customer termina-
tion. 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 profi tability result in an immediate adjustment of
earnings; such adjustments increased earnings by $0.3 billion,
$0.7 billion and $0.4 billion in 2007, 2006 and 2005, respectively.
We provide for probable losses.
Carrying amounts for product services agreements in progress
at December 31, 2007 and 2006, were $5.5 billion and $4.8 billion,
respectively, and are included in the line, “Contract costs and
estimated earnings” in note 16.
Further information is provided in note 1.
ASSET IMPAIRMENT assessment involves various estimates and
assumptions as follows:
INVESTMENTS. We regularly review investment securities for
impairment based on both quantitative and qualitative criteria
that include the extent to which cost exceeds market value, the
duration of that market decline, our intent and ability to hold to
maturity or until forecasted recovery, and the fi nancial health of
and specifi c prospects for the issuer. We perform comprehensive
market research and analysis and monitor market conditions to
identify potential impairments.
At December 31, 2007, our investment in preferred and
common stock, $0.3 billion and $0.1 billion, respectively, of FGIC
Corporation (FGIC), a monoline credit insurer, was accounted for
on the cost method and was in an insignifi cant unrealized loss
position. See note 16. During 2008, credit rating agencies down-
graded FGIC; following the downgrades, various alternative out-
comes were possible. We continue to monitor this investment
closely, including review for impairment.
Further information about actual and potential impairment
losses is provided in the Financial Resources and Liquidity —
Investment Securities section and in notes 1, 9 and 16.
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
undiscounted cash fl ows are directly related to the potentially
impaired asset, the useful life over which cash fl ows 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 fl ow estimates from
our historical experience and our internal business plans. To
determine fair value, we use our internal cash fl ow estimates
discounted at an appropriate interest rate, quoted market prices
when available and independent appraisals, as appropriate.
Commercial aircraft are a signifi cant concentration of assets in
Infrastructure, and are particularly subject to market fl uctuations.
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 specifi c lessee’s credit
standing changes. We consider market conditions, such as the
continued global shortage of commercial aircraft. Estimates of
future rentals and residual values are based on historical experi-
ence and information received routinely from independent
appraisers. Estimated cash fl ows from future leases are reduced
for expected downtime between leases and for estimated tech-
nical costs required to prepare aircraft to be redeployed. Fair value
used to measure impairment is based on current market values
from independent appraisers.
We recognized impairment losses on our operating lease
portfolio of commercial aircraft of $0.1 billion in 2007 and 2006.
Provisions for losses on fi nancing receivables related to commer-
cial aircraft were insignifi cant in 2007 and 2006.
Further information on impairment losses and our exposure to
the commercial aviation industry is provided in the Operations —
Overview section and in notes 14 and 28.
REAL ESTATE. We review our real estate investment portfolio for
impairment regularly or when events or circumstances indicate
that the related carrying amounts may not be recoverable.
Our portfolio is diversifi ed, both geographically and by asset type.
However, the global real estate market is subject to periodic
cycles that can cause signifi cant fl uctuations in market values.
While the current estimated value of our Commercial Finance
Real Estate investments exceeds our carrying value by about
$3 billion, the same as last year, downward cycles could adversely
affect our ability to realize these gains in an orderly fashion in
the future and may necessitate recording impairments.