GE 2008 Annual Report Download - page 61

ge 2008 annual report 59
notes to consolidated financial statements
The remainder of our commercial loans and leases are portfo-
lios of smaller balance homogenous commercial and equipment
positions that we evaluate collectively by portfolio for impairment
based upon various statistical analyses considering historical
losses and aging, as well as our view on current market and
economic conditions.
Partial Sales of Business Interests
We record gains or losses on sales of their own shares by affiliates
except when realization of gains is not reasonably assured, in
which case we record the results in shareowners’ equity. We
record gains or losses on sales of interests in commercial and
military engine and aeroderivative equipment programs.
Cash and Equivalents
Debt securities and money market instruments with original
maturities of three months or less are included in cash equiva-
lents unless designated as available-for-sale and classified as
investment securities.
Investment Securities
We report investments in debt and marketable equity securities,
and equity securities in our insurance portfolio, at fair value. See
Note 28 for further information on fair value. Unrealized gains and
losses on available-for-sale investment securities are included in
shareowners’ equity, net of applicable taxes and other adjustments.
We regularly review investment securities for impairment using
both quantitative and qualitative criteria. Quantitative criteria
include the length of time and magnitude of the amount that
each security is in an unrealized loss position and, for securities
with fixed maturities, whether the issuer is in compliance with
terms and covenants of the security. Qualitative criteria include
the financial health of and specific prospects for the issuer, as
well as our intent and ability to hold the security to maturity or
until forecasted recovery. Unrealized losses that are other than
temporary are recognized in earnings. Realized gains and losses
are accounted for on the specific identification method. Unrealized
gains and losses on investment securities classified as trading
and certain retained interests are included in earnings.
Inventories
All inventories are stated at the lower of cost or realizable values.
Cost for a significant portion of GE U.S. inventories is determined
on a last-in, first-out (LIFO) basis. Cost of other GE inventories is
determined on a first-in, first-out (FIFO) basis. LIFO was used for
40% and 41% of GE inventories at December 31, 2008 and 2007,
respectively. GECS inventories consist of finished products held
for sale; cost is determined on a FIFO basis.
We write off unsecured closed-end installment loans at
120 days contractually past due and unsecured open-ended
revolving loans at 180 days contractually past due. We write down
consumer loans secured by collateral other than residential real
estate when such loans are 120 days past due. Consumer loans
secured by residential real estate (both revolving and closed-end
loans) are written down to the fair value of collateral, less costs
to sell, no later than when they become 360 days past due.
During 2007, we conformed our reserving methodology in our
residential mortgage loan portfolios. Unsecured consumer loans
in bankruptcy are written off within 60 days of notification of
filing by the bankruptcy court or within contractual write-off
periods, whichever occurs earlier.
Our commercial loan and lease portfolio consists of a variety of
loans and leases, including both larger balance, non-homogenous
loans and leases and smaller balance homogenous commercial
and equipment loans and leases. Losses on such loans and leases
are recorded when probable and estimable. We routinely evalu-
ate our entire portfolio for potential specific credit or collection
issues that might indicate an impairment. For larger balance,
non-homogenous loans and leases, this survey first considers
the financial status, payment history, collateral value, industry
conditions and guarantor support related to specific customers. Any
delinquencies or bankruptcies are indications of potential impair-
ment requiring further assessment of collectibility. We routinely
receive financial as well as rating agency reports on our customers,
and we elevate for further attention those customers whose
operations we judge to be marginal or deteriorating. We also
elevate customers for further attention when we observe a decline
in collateral values for asset-based loans. While collateral values
are not always available, when we observe such a decline, we
evaluate relevant markets to assess recovery alternatives— for
example, for real estate loans, relevant markets are local; for air-
craft loans, relevant markets are global. We provide allowances
based on our evaluation of all available information, including
expected future cash flows, fair value of collateral, net of disposal
costs, and the secondary market value of the financing receivables.
After providing for specific incurred losses, we then determine
an allowance for losses that have been incurred in the balance
of the portfolio but cannot yet be identified to a specific loan or
lease. This estimate is based on historical and projected default
rates and loss severity, and it is prepared by each respective line
of business.
Experience is not available with new products; therefore, while
we are developing that experience, we set loss allowances based
on our experience with the most closely analogous products in
our portfolio.
When we repossess collateral in satisfaction of a loan, we
write down the receivable against the allowance for losses.
Repossessed collateral is included in the caption “All other assets”
in the Statement of Financial Position and carried at the lower
of cost or estimated fair value less costs to sell.