GE 2007 Annual Report Download - page 76

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74 ge 2007 annual report
represent our best estimate of the ultimate obligations for
reported and incurred-but-not-reported claims and the related
estimated claim settlement expenses. Liabilities for unpaid claims
and claims adjustment expenses are continually reviewed and
adjusted through current operations.
Accounting changes
On January 1, 2007, we adopted FASB Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes, and FASB Staff
Position (FSP) FAS 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction. Among other
things, FIN 48 requires application of a “more likely than not”
threshold to the recognition and derecognition of tax positions.
FSP FAS 13-2 requires recalculation of returns on leveraged
leases when there is a change in the timing or projected timing
of cash fl ows relating to income taxes associated with such
leases. The January 1, 2007, transition reduced our retained
earnings by $126 million, $49 million associated with FIN 48 and
$77 million with FSP FAS 13-2. Of this total, $89 million was a
decrease in goodwill and $77 million was a decrease in fi nancing
receivables — net, partially offset by a $40 million decrease in
income tax liabilities.
On January 1, 2007, we adopted FASB Statement of Financial
Accounting Standards (SFAS) 155, Accounting for Certain Hybrid
Financial Instruments. This statement amended SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended, to include within its scope prepayment features in
newly created or acquired retained interests related to securiti-
zations. SFAS 155 changed the basis on which we recognize
earnings on these retained interests from level yield to fair value.
See notes 9 and 27.
We adopted SFAS 123 (Revised 2004), Share-Based Payment
(SFAS 123R) and related FSPs, effective January 1, 2006. Among
other things, SFAS 123R requires expensing the fair value of stock
options, a previously optional accounting method that we adopted
voluntarily in 2002, and classifi cation of excess tax benefi ts asso-
ciated with share-based compensation deductions as cash from
fi nancing activities rather than cash from operating activities.
We chose the modifi ed prospective transition method, which
requires that the new guidance be applied to the unvested portion
of all outstanding stock option grants as of January 1, 2006, and
to new grants after that date. We further applied the alternative
transition method provided in FSP FAS 123(R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment
Awards. The transitional effects of SFAS 123R and related FSPs
consisted of a reduction in net earnings of $10 million for the
year ended December 31, 2006, to expense the unvested portion
of options granted in 2001; and classifi cation of $173 million
related to excess tax benefi ts from share-based compensation
deductions as cash from fi nancing activities in our Statement of
Cash Flows beginning in 2006, which previously would have
been included in cash from operating activities.
SFAS 158, Employers’ Accounting for Defi ned Benefi t Pension
and Other Postretirement Plans, became effective for us as of
December 31, 2006, and requires recognition of an asset or liability
in the statement of fi nancial position refl ecting the funded status
of pension and other postretirement benefi t plans such as retiree
health and life, with current-year changes in the funded status
recognized in shareowners’ equity. SFAS 158 did not change
the existing criteria for measurement of periodic benefi t costs,
plan assets or benefi t obligations. The incremental effect of the
initial adoption of SFAS 158 reduced our shareowners’ equity at
December 31, 2006, by $3,819 million.
Note 2
Discontinued Operations
We classifi ed our Japanese personal loan business (Lake), our U.S.
mortgage business (WMC), Plastics, Advanced Materials, GE Life,
Genworth Financial, Inc. (Genworth) and most of GE Insurance
Solutions Corporation (GE Insurance Solutions) as discontinued
operations. Associated results of operations, fi nancial position
and cash fl ows are separately reported for all periods presented.
WMC
In December 2007, we completed the sale of our U.S. mortgage
business for $117 million in cash. In connection with the transac-
tion, certain contractual obligations and potential liabilities related
to previously sold loans were retained. We sold this business
because of continued pressures in the U.S. subprime mortgage
industry. As a result, we recognized an after-tax loss of $62 million
during 2007. WMC revenues from discontinued operations were
($1,424) million, $536 million and $607 million in 2007, 2006 and
2005, respectively. In total, WMC’s loss from discontinued operations,
net of taxes, was $987 million in 2007, compared with earnings
of $29 million and $122 million in 2006 and 2005, respectively.
Lake
In September 2007, we committed to a plan to sell our Lake
business. We made the decision to sell this business upon deter-
mining that, despite restructuring, Japanese regulatory limits for
interest charges on unsecured personal loans did not permit us
to earn an acceptable return. We are actively pursuing a buyer
and expect to complete the sale of this business by the end of the
third quarter of 2008. In connection with this exit, we recorded
an after-tax loss of $908 million in 2007, which represents the
difference between the net book value of our Lake business and
the projected sale price. Lake revenues from discontinued opera-
tions were $1,056 million, $1,440 million and $1,737 million in 2007,
2006 and 2005, respectively. In total, Lake’s loss from discontinued
operations, net of taxes, was $1,231 million in 2007, compared
with earnings of $211 million and $401 million in 2006 and 2005,
respectively.
Plastics and Advanced Materials
In August 2007, we completed the sale of our Plastics business
to Saudi Basic Industries Corporation for $11,577 million in cash.
We sold this business because of its cyclicality, rising costs of
natural gas and raw materials, and the decision to redeploy capital
resources into higher-growth businesses. Also, during the fourth