GE 2009 Annual Report Download - page 56

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54 GE 2009 ANNUAL REPORT
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
frequency and extent of future monitoring, maintenance and
overhaul 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
an adjustment of earnings; such adjustments increased earnings
by $0.2 billion in 2009, decreased earnings by $0.2 billion in 2008
and increased earnings by $0.4 billion in 2007. We provide for
probable losses when they become evident.
Further information is provided in Notes 1 and 9.
ASSET IMPAIRMENT assessment involves various estimates and
assumptions as follows:
Investments. We regularly review investment securities for
impairment using both quantitative and qualitative criteria.
Effective April 1, 2009, the FASB amended ASC 320 and modified
the requirements for recognizing and measuring other-than-
temporary impairment for debt securities. If we do not intend to
sell the security and it is not more likely than not that we will be
required to sell the security before recovery of our amortized
cost, we evaluate other qualitative criteria to determine whether
a credit loss exists, such as the financial health of and specific
prospects for the issuer, including whether the issuer is in com-
pliance with the terms and covenants of the security. Quantitative
criteria include determining whether there has been an adverse
change in expected future cash flows. For equity securities, our
criteria include the length of time and magnitude of the amount
that each security is in an unrealized loss position. Our other-than-
temporary impairment reviews involve our finance, risk and asset
management functions as well as the portfolio management
and research capabilities of our internal and third-party asset
managers. See Note 1, which discusses the determination of fair
value of investment securities.
Further information about actual and potential impairment
losses is provided in the Financial Resources and Liquidity —
Investment Securities section and in Notes 1, 3 and 9.
Long-Lived Assets. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Determining
whether an impairment has occurred typically requires various
estimates and assumptions, including determining which undis-
counted cash flows are directly related to the potentially impaired
asset, the useful life over which cash flows will occur, their amount,
and the asset’s residual value, if any. In turn, measurement of an
impairment loss requires a determination of fair value, which is
based on the best information available. We derive the required
undiscounted cash flow estimates from our historical experience
and our internal business plans. To determine fair value, we use
quoted market prices when available, our internal cash flow
estimates discounted at an appropriate interest rate and indepen-
dent appraisals, as appropriate.
Our operating lease portfolio of commercial aircraft is a signifi-
cant concentration of assets in Capital Finance, and is particularly
subject to market fluctuations. Therefore, we test recoverability
of each aircraft in our operating lease portfolio at least annually.
Additionally, we perform quarterly evaluations in circumstances
such as when aircraft are re-leased, current lease terms have
changed or a specific lessee’s credit standing changes. We con-
sider market conditions, such as global demand for commercial
aircraft. Estimates of future rentals and residual values are based
on historical experience and information received routinely from
independent appraisers. Estimated cash flows from future leases
are reduced for expected downtime between leases and for
estimated technical costs required to prepare aircraft to be
redeployed. Fair value used to measure impairment is based on
management’s best estimate. In determining its best estimate,
management evaluates average current market values (obtained
from third parties) of similar type and age aircraft, which are
adjusted for the attributes of the specific aircraft under lease.
We recognized impairment losses on our operating lease
portfolio of commercial aircraft of $0.1 billion in both 2009 and
2008. Provisions for losses on financing receivables related to
commercial aircraft were $0.1 billion in 2009 and insignificant
in 2008.
Further information on impairment losses and our exposure to
the commercial aviation industry is provided in the Operations —
Overview section and in Notes 7 and 24.
Real Estate. We review the estimated value of our commercial
real estate investments semi-annually. The cash flow estimates
used for both estimating value and the recoverability analysis are
inherently judgmental, and reflect current and projected lease
profiles, available industry information about expected trends in
rental, occupancy and capitalization rates and expected business
plans, which include our estimated holding period for the asset.
Our portfolio is diversified, both geographically and by asset type.
However, the global real estate market is subject to periodic
cycles that can cause significant fluctuations in market values.
As of our most recent estimate performed in 2009, the carrying
value of our Real Estate investments exceeded their estimated
value by about $7 billion. The estimated value of the portfolio
reflects the continued deteriorating real estate values and market
fundamentals, including reduced market occupancy rates and
market rents as well as the effects of limited real estate market