GE 2007 Annual Report Download - page 63

ge 2007 annual report 61
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We use our historical experience and our short and long-range
business forecasts to provide insight. Further, our global and
diversifi ed business portfolio gives us the opportunity to employ
various prudent and feasible tax planning strategies to facilitate
the recoverability of future deductions. Amounts recorded for
deferred tax assets related to non-U.S. net operating losses,
net of valuation allowance were $1.7 billion and $1.5 billion at
December 31, 2007 and 2006, respectively. Such year-end 2007
amounts are expected to be fully recoverable within the applicable
statutory expiration periods. To the extent we do not consider it
more likely than not that a deferred tax asset will be recovered,
a valuation allowance is established.
Further information on income taxes is provided in the
Operations — Overview section and in notes 7 and 20.
DERIVATIVES AND HEDGING. We use derivatives to manage a
variety of risks, including risks related to interest rates, foreign
exchange and commodity prices. Accounting for derivatives as
hedges requires that, at inception and over the term of the
arrangement, the hedged item and related derivative meet the
requirements for hedge accounting. The rules and interpreta-
tions related to derivatives accounting are complex. Failure to
apply this complex guidance correctly will result in all changes
in the fair value of the derivative being reported in earnings,
without regard to the offsetting changes in the fair value of the
hedged item.
In evaluating whether a particular relationship qualifi es for
hedge accounting, we fi rst determine whether the relationship
meets the strict criteria to qualify for exemption from ongoing
effectiveness testing. For a relationship that does not meet these
criteria, we test effectiveness at inception and quarterly there-
after by determining whether changes in the fair value of the
derivative offset, within a specifi ed range, changes in the fair
value of the hedged item. This test is conducted each reporting
period. If fair value changes fail this test, we discontinue applying
hedge accounting to that relationship prospectively. Fair values
of both the derivative instrument and the hedged item are calcu-
lated using internal valuation models incorporating market-based
assumptions, subject to third-party confi rmation.
At December 31, 2007, derivative assets and liabilities were
$3.6 billion and $2.6 billion, respectively. Further information
about our use of derivatives is provided in notes 17, 22 and 26.
OTHER LOSS CONTINGENCIES are recorded as liabilities when it is
probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Disclosure is required when there is
a reasonable possibility that the ultimate loss will materially exceed
the recorded provision. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis of
multiple forecasts that often depend on judgments about potential
actions by third parties such as regulators.
Further information is provided in notes 19 and 28.
Other Information
New Accounting Standards
On September 15, 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) 157, Fair Value Measurements, which defi nes fair value,
establishes a new framework for measuring that value and
expands disclosures about fair value measurements. Broadly,
SFAS 157 defi nes fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. SFAS 157 established market or
observable inputs as the preferred source of values, followed by
assumptions based on hypothetical transactions in the absence
of market inputs. SFAS 157 will require, among other things,
expanded disclosure about fair value measurements that have a
signifi cant portion of the value determined using unobservable
inputs (level 3 measurements). The standard applies prospectively
to new fair value measurements performed after the required
effective dates, which are as follows: on January 1, 2008, the
standard applied to our measurements of the fair values of
fi nancial instruments and recurring fair value measurements of
non-fi nancial assets and liabilities; on January 1, 2009, the stan-
dard will apply to all remaining fair value measurements, including
non-recurring measurements of non-fi nancial assets and liabilities
such as measurement of potential impairments of goodwill,
other intangible assets and other long-lived assets. It also will
apply to fair value measurements of non-fi nancial assets acquired
and liabilities assumed in business combinations. On January 18,
2008, the FASB issued proposed FASB Staff Position (FSP) FAS 157-c,
Measuring Liabilities under Statement 157, which will modify the
defi nition of fair value by requiring estimation of the proceeds
that would be received if the entity were to issue the liability at
the measurement date. Further revisions to the measurement
guidance are possible and we are monitoring emerging interpre-
tations and developments. SFAS 157 will not have a material
effect on our earnings or fi nancial position and will have no
effect on our cash fl ows.
On February 15, 2007, the FASB issued SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. Under this
standard, we may elect to report individual fi nancial instruments
and certain other items at fair value with changes in value
reported in operations. Once made, this election is irrevocable for
those items. SFAS 159 was effective for us on January 1, 2008,
and we made the election for $0.2 billion of assets.