GE 2008 Annual Report Download - page 46

management’s discussion and analsis
44 ge 2008 annual report
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section
are those that we consider to be the most critical to an under-
standing of our financial statements because they inherently
involve significant judgments and uncertainties. All of these
estimates reflect our best judgment about the current, and for
some estimates future, economic and market conditions and
their effects based on information available as of the date of
these financial statements. If such conditions persist longer or
deteriorate further than expected, it is reasonably possible that
the judgments and estimates described below could change,
which may result in future impairments of investment securities,
goodwill, intangibles and long-lived assets, incremental losses
on financing receivables, establishment of valuation allowances
on deferred tax assets and increased tax liabilities, among other
effects. Also see Note 1, Summary of Significant Accounting
Policies, which discusses the significant accounting policies that
we have selected from acceptable alternatives.
LOSSES ON FINANCING RECEIVABLES are recognized when they
are incurred, which requires us to make our best estimate of
probable losses inherent in the portfolio. Such estimate requires
consideration of historical loss experience, adjusted for current
conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as
delinquency rates, financial health of specific customers and
market sectors, collateral values, and the present and expected
future levels of interest rates. Our risk management process
includes standards and policies for reviewing major risk expo-
sures and concentrations, and evaluates relevant data either for
individual loans or financing leases, or on a portfolio basis, as
appropriate.
Further information is provided in the Global Risk Management
section and 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 PRODUCT SERVICES
AGREEMENTS requires estimates of profits over the multiple-year
terms of such agreements, considering factors such as the fre-
quency and extent of future monitoring, maintenance and over-
haul 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 sufficient to offset our accumulated invest-
ment in the event of customer termination. 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 profitability result in
The following conditions relate to consolidated entities:
Þ If the short-term credit rating of GE Capital or certain consoli-
dated entities discussed further in Note 30 were to be reduced
below A–1/P–1, GE Capital would be required to provide sub-
stitute liquidity for those entities or provide funds to retire the
outstanding commercial paper. The maximum net amount
that GE Capital would be required to provide in the event of
such a downgrade is determined by contract, and amounted
to $3.8 billion at December 31, 2008.
Þ One group of consolidated entities holds investment securities
funded by the issuance of GICs. If the long-term credit rating
of GE Capital were to fall below AA–/Aa3 or its short-term
credit rating were to fall below A–1+/P–1, GE Capital would
be required to provide approximately $3.5 billion of capital to
such entities as of December 31, 2008, pursuant to letters of
credit issued by GECC. To the extent that the entities’ liabilities
exceed the ultimate value of the proceeds from the sale of
their assets and the amount drawn under the letters of credit,
GE Capital could be required to provide such excess amount.
As of December 31, 2008, the value of these entities’ liabilities
was $10.7 billion and the fair value of their assets was
$9.2 billion (which included unrealized losses on investment
securities of $2.1 billion). With respect to these investment
securities, we intend to hold them at least until such time as
their individual fair values exceed their amortized cost and
we have the ability to hold all such debt securities until
maturity.
Þ Another consolidated entity also issues GICs where proceeds
are loaned to GE Capital. If the long-term credit rating of
GE Capital were to fall below AA–/Aa3 or its short-term credit
rating were to fall below A–1+/P–1, GE Capital could be required
to provide up to approximately $4.7 billion as of December 31,
2008 to repay holders of GICs.
In our history, we have never violated any of the above conditions
at GE, GECS or GE Capital.
On November 12, 2008, the FDIC approved GE Capital’s appli-
cation for designation as an eligible entity under the FDIC’s TLGP.
Qualifying debt issued by GE Capital is guaranteed under the Debt
Guarantee Program of the FDIC’s TLGP and is backed by the full
faith and credit of the United States. The FDIC’s guarantee under
the TLGP is effective until the earlier of the maturity of the debt
or June 30, 2012. The maximum amount of debt that GE Capital
is permitted to have issued and outstanding under the Debt
Guarantee Program at any time is approximately $126 billion.
At December 31, 2008, GE Capital had issued and outstanding,
$35.2 billion of senior, unsecured debt that was guaranteed by the
FDIC. GE Capital and GE entered into an Eligible Entity Designation
Agreement and GE Capital is subject to the terms of a Master
Agreement, each entered into with the FDIC. The terms of these
agreements include, among other things, a requirement that GE
and GE Capital reimburse the FDIC for any amounts that the
FDIC pays to holders of debt that is guaranteed by the FDIC.