GE 2007 Annual Report Download - page 62

60 ge 2007 annual report
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GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS. We test good-
will for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred,
such as a signifi cant adverse change in the business climate or
a decision to sell or dispose all or a portion of a reporting unit.
Determining whether an impairment has occurred requires valu-
ation of the respective reporting unit, which we estimate using a
discounted cash fl ow method. For fi nancial services reporting
units, these cash fl ows are reduced for estimated interest costs.
Also, when determining the amount of goodwill to be allocated
to a business disposition for a fi nancial services business, we
reduce the cash proceeds we receive from the sale by the amount
of debt which is allocated to the sold business in order to be
consistent with the reporting unit valuation methodology. When
available and as appropriate, we use comparative market multi-
ples to corroborate discounted cash fl ow results. In applying this
methodology, we rely on a number of factors, including actual
operating results, future business plans, economic projections
and market data.
If this analysis indicates goodwill is impaired, measuring the
impairment requires a fair value estimate of each identifi ed
tangible and intangible asset. In this case, we supplement the
cash fl ow approach discussed above with independent appraisals,
as appropriate.
We test other identifi ed intangible assets with defi ned useful
lives and subject to amortization by comparing the carrying
amount to the sum of undiscounted cash fl ows expected to be
generated by the asset. We test intangible assets with indefi nite
lives annually for impairment using a fair value method such as
discounted cash fl ows. For our insurance activities remaining in
continuing operations, we periodically test for impairment our
deferred acquisition costs and present value of future profi ts.
Further information is provided in the Financial Resources
and Liquidity — Goodwill and Other Intangible Assets section and
in notes 1 and 15.
PENSION ASSUMPTIONS are signifi cant inputs to the actuarial mod-
els that measure pension benefi t obligations and related effects
on operations. Two assumptions — discount rate and expected
return on assets — are important elements of plan expense and
asset/liability measurement. We evaluate these critical assump-
tions at least annually on a plan and country-specifi c basis.
We periodically evaluate other assumptions involving demographic
factors, such as retirement age, mortality and turnover, and update
them to refl ect our experience and expectations for the future.
Actual results in any given year will often differ from actuarial
assumptions because of economic and other factors.
Accumulated and projected benefi t obligations are expressed
as the present value of future cash payments. We discount those
cash payments using the weighted average of market-observed
yields for high quality fi xed income securities with maturities
that correspond to the payment of benefi ts. Lower discount rates
increase present values and subsequent-year pension expense;
higher discount rates decrease present values and subsequent-
year pension expense.
Our discount rates for principal pension plans at December 31,
2007, 2006 and 2005 were 6.34%, 5.75% and 5.50%, respectively,
refl ecting market interest rates.
To determine the expected long-term rate of return on pension
plan assets, we consider the current and expected asset allocations,
as well as historical and expected returns on various categories
of plan assets. Assets in our principal pension plans earned
13.6% in 2007, and had average annual earnings of 14.9%, 9.2%
and 12.2% per year in the fi ve-, 10- and 25-year periods ended
December 31, 2007, respectively. We believe that these results,
in connection with our current and expected asset allocations,
support our assumed long-term return of 8.5% on those assets.
At December 31, 2007, our principal pension plans had
$1.0 billion of exposure to subprime credit, a majority of which
related to residential mortgage-backed securities receiving credit
ratings of Double A or better from the major rating agencies.
Monolines insured $0.5 billion, including $0.1 billion of residential
mortgage-backed securities. Our subprime investment securities
were collateralized primarily by pools of individual, direct mort-
gage loans, not other structured products such as collateralized
debt obligations.
Sensitivity to changes in key assumptions for our principal
pension plans follows.
• Discount rate — a 25 basis point increase in discount rate
would decrease pension cost in the following year by
$0.2 billion.
• Expected return on assets — a 50 basis point increase in the
expected return on assets would decrease pension cost in
the following year by $0.3 billion.
Further information on our pension plans is provided in the
Operations — Overview section and in note 6.
INCOME TAXES. Our annual tax rate is based on our income, stat-
utory tax rates and tax planning opportunities available to us in
the various jurisdictions in which we operate. Tax laws are com-
plex and subject to different interpretations by the taxpayer and
respective governmental taxing authorities. Signifi cant judgment
is required in determining our tax expense and in evaluating our
tax positions including evaluating uncertainties under Financial
Accounting Standards Board Interpretation (FIN) 48, Accounting
for Uncertainty in Income Taxes. We review our tax positions
quarterly and adjust the balances as new information becomes
available. Deferred income tax assets represent amounts available
to reduce income taxes payable on taxable income in future years.
Such assets arise because of temporary differences between
the fi nancial reporting and tax bases of assets and liabilities, as
well as from net operating loss and tax credit carryforwards.
We evaluate the recoverability of these future tax deductions by
assessing the adequacy of future expected taxable income from
all sources, including reversal of taxable temporary differences,
forecasted operating earnings and available tax planning strategies.
These sources of income inherently rely heavily on estimates.