GE 2008 Annual Report Download - page 62

60 ge 2008 annual report
notes to consolidated financial statements
Premiums received on investment contracts (including annui-
ties without significant mortality risk) and universal life contracts
are not reported as revenues but rather as deposit liabilities.
We recognize revenues for charges and assessments on these
contracts, mostly for mortality, contract initiation, administration
and surrender. Amounts credited to policyholder accounts are
charged to expense.
Liabilities for traditional long-duration insurance contracts
represent the present value of such benefits less the present value
of future net premiums based on mortality, morbidity, interest
and other assumptions at the time the policies were issued or
acquired. Liabilities for investment contracts and universal life
policies equal the account value, that is, the amount that accrues
to the benefit of the contract or policyholder including credited
interest and assessments through the financial statement date.
Liabilities for unpaid claims and claims adjustment expenses
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
Effective January 1, 2008, we adopted Statement of Financial
Accounting Standards (SFAS) 157, Fair Value Measurements, for
all financial instruments and non-financial instruments accounted
for at fair value on a recurring basis. SFAS 157 establishes a new
framework for measuring fair value and expands related disclo-
sures. See Note 28.
Effective January 1, 2008, we adopted SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. Upon adoption,
we elected to report $172 million of commercial mortgage loans
at fair value in order to recognize them on the same accounting
basis (measured at fair value through earnings) as the derivatives
economically hedging these loans. See Note 28.
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 flows 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 financing receivables—
net, partially offset by a $40 million decrease in income tax
liabilities.
Intangible Assets
We do not amortize goodwill, but test it at least annually for
impairment using a fair value approach at the reporting unit level.
A reporting unit is the operating segment, or a business one level
below that operating segment (the component level) if discrete
financial information is prepared and regularly reviewed by seg-
ment management. However, components are aggregated as a
single reporting unit if they have similar economic characteristics.
We recognize an impairment charge if the carrying amount of a
reporting unit exceeds its fair value and the carrying amount of
the reporting unit’s goodwill exceeds the implied fair value of that
goodwill. We use discounted cash flows to establish fair values.
When available and as appropriate, we use comparative market
multiples to corroborate discounted cash flow results. When all or
a portion of a reporting unit is disposed of, goodwill is allocated
to the gain or loss on disposition based on the relative fair values
of the business disposed of and the portion of the reporting unit
that will be retained.
We amortize the cost of other intangibles over their estimated
useful lives unless such lives are deemed indefinite. The cost of
intangible assets is generally amortized on a straight-line basis
over the asset’s estimated economic life, except that individually
significant customer-related intangible assets are amortized in
relation to total related sales. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if
impaired, written down to fair value based on either discounted
cash flows or appraised values. Intangible assets with indefinite
lives are tested annually for impairment and written down to fair
value as required.
GECS Investment Contracts, Insurance Liabilities and
Insurance Annuity Benefits
Certain entities, which we consolidate, provide guaranteed invest-
ment contracts to states, municipalities and municipal authorities.
Our insurance activities also include providing insurance and
reinsurance for life and health risks and providing certain annuity
products. Three product groups are provided: traditional insurance
contracts, investment contracts and universal life insurance
contracts. Insurance contracts are contracts with significant
mortality and/or morbidity risks, while investment contracts are
contracts without such risks. Universal life insurance contracts
are a particular type of long-duration insurance contract whose
terms are not fixed and guaranteed.
For short-duration insurance contracts, including accident and
health insurance, we report premiums as earned income over the
terms of the related agreements, generally on a pro-rata basis.
For traditional long-duration insurance contracts including term,
whole life and annuities payable for the life of the annuitant, we
report premiums as earned income when due.