GE 2008 Annual Report Download - page 48

management’s discussion and analsis
46 ge 2008 annual report
PENSION ASSUMPTIONS are significant inputs to the actuarial
models that measure pension benefit 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-specific basis. We
periodically evaluate other assumptions involving demographic
factors, such as retirement age, mortality and turnover, and update
them to reflect 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 benefit 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 fixed income securities with maturities that
correspond to the payment of benefits. 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,
2008, 2007 and 2006 were 6.11%, 6.34% and 5.75%, respectively,
reflecting market interest rates.
To determine the expected long-term rate of return on pension
plan assets, we consider current and expected asset allocations,
as well as historical and expected returns on various categories
of plan assets. In developing future return expectations for our
principal benefit plans’ assets, we evaluate general market trends
as well as key elements of asset class returns such as expected
earnings growth, yields and spreads across a number of potential
scenarios. Assets in our principal pension plans declined 28.2% in
2008, and had average annual earnings of 3.3%, 4.0% and 10.1%
per year in the five-, 10- and 25-year periods ended December 31,
2008, respectively. In 2007, assets in our principal pension plans
earned 13.6% and had average annual earnings of 14.9%, 9.2%
and 12.2% per year in the five-, 10- and 25-year periods ended
December 31, 2007, respectively. Based on our analysis of future
expectations of asset performance, past return results, and our
current and expected asset allocations, we have assumed an 8.5%
long-term expected return on those assets.
Sensitivity to changes in key assumptions for our principal pension
plans follows.
Þ Discount rate— A 25 basis point increase in discount rate would
decrease pension cost in the following year by $0.2 billion.
Þ Expected return on assets— A 50 basis point decrease in the
expected return on assets would increase 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.
Goodwill and Other Identified Intangible Assets. We test goodwill
for impairment annually and whenever events or circumstances
make it more likely than not that the fair value of a reporting
unit has fallen below its carrying amount, such as a significant
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 valuation of the respective
reporting unit, which we estimate using a discounted cash flow
method. For financial services reporting units, these cash flows
are reduced for estimated interest costs. Also, when determining
the amount of goodwill to be allocated to a business disposition
for a financial 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 multiples to corroborate discounted
cash flow 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 identified tan-
gible and intangible asset. In this case, we supplement the cash
flow approach discussed above with independent appraisals, as
appropriate.
Given the significant changes in the business climate for
financial services and our stated strategy to reduce our Capital
Finance ending net investment, we re-tested goodwill for impair-
ment at the reporting units within Capital Finance during the
fourth quarter of 2008. In performing this analysis, we revised our
estimated future cash flows and discount rates, as appropriate,
to reflect current market conditions in the financial services
industry. In each case, no impairment was indicated. Reporting
units within Capital Finance are CLL, GE Money, Real Estate, Energy
Financial Services and GECAS, which had goodwill balances at
December 31, 2008, of $12.8 billion, $9.1 billion, $1.2 billion,
$2.2 billion and $0.2 billion, respectively.
We review identified intangible assets with defined useful
lives and subject to amortization for impairment whenever events
or changes in circumstances indicate that the related carrying
amounts may not be recoverable. Determining whether an impair-
ment loss occurred requires comparing the carrying amount to
the sum of undiscounted cash flows expected to be generated by
the asset. We test intangible assets with indefinite lives annually
for impairment using a fair value method such as discounted
cash flows. For our insurance activities remaining in continuing
operations, we periodically test for impairment our deferred
acquisition costs and present value of future profits.
Further information is provided in the Financial Resources
and Liquidity —Goodwill and Other Intangible Assets section and
in Notes 1 and 15.