GE 2009 Annual Report Download - page 57

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GE 2009 ANNUAL REPORT 55
liquidity. Given the current and expected challenging market
conditions, there continues to be risk and uncertainty surrounding
commercial real estate values and our unrealized loss on real
estate equity properties may continue to increase. Declines in
the estimated value of real estate below carrying amount result
in impairment losses when the aggregate undiscounted cash flow
estimates used in the estimated value measurement are below
the carrying amount. As such, estimated losses in the portfolio
will not necessarily result in recognized impairment losses.
When we recognize an impairment, the impairment is measured
based upon the fair value of the underlying asset, which is based
upon current market data, including current capitalization rates.
During 2009, Capital Finance Real Estate recognized pre-tax
impairments of $0.8 billion in its real estate held for investment,
as compared to $0.3 billion in 2008. Continued deterioration in
economic conditions or prolonged market illiquidity may result in
further impairments being recognized. Furthermore, significant
judgment and uncertainty related to forecasted valuation trends,
especially in illiquid markets, results in inherent imprecision in
real estate value estimates. Further information is provided in the
Global Risk Management section and in Note 9.
Goodwill and Other Identified Intangible Assets. We test goodwill
for impairment annually and more frequently if circumstances
warrant. We determine fair values for each of the reporting units
using an income approach. When available and as appropriate,
we use comparative market multiples to corroborate discounted
cash flow results. For purposes of the income approach, fair value
is determined based on the present value of estimated future
cash flows, discounted at an appropriate risk-adjusted rate. We
use our internal forecasts to estimate future cash flows and
include an estimate of long-term future growth rates based on
our most recent views of the long-term outlook for each business.
Actual results may differ from those assumed in our forecasts.
We derive our discount rates by applying the capital asset pricing
model (i.e., to estimate the cost of equity financing) and analyzing
published rates for industries relevant to our reporting units.
We use discount rates that are commensurate with the risks and
uncertainty inherent in the respective businesses and in our inter-
nally developed forecasts. Valuations using the market approach
reflect prices and other relevant observable information generated
by market transactions involving comparable businesses.
Compared to the market approach, the income approach more
closely aligns the reporting unit valuation to a company’s or busi-
ness’ specific business model, geographic markets and product
offerings, as it is based on specific projections of the business.
Required rates of return, along with uncertainty inherent in the
forecasts of future cash flows, are reflected in the selection of the
discount rate. Equally important, under this approach, reasonably
likely scenarios and associated sensitivities can be developed
for alternative future circumstances that may not be reflected in
an observable market price. A market approach allows for com-
parison to actual market transactions and multiples. It can be
somewhat more limited in its application because the population of
potential comparables (or pure plays) is often limited to publicly-
traded companies where the characteristics of the comparative
business and ours can be significantly different, market data is
usually not available for divisions within larger conglomerates or
non-public subsidiaries that could otherwise qualify as comparable,
and the specific circumstances surrounding a market transaction
(e.g., synergies between the parties, terms and conditions of the
transaction, etc.) may be different or irrelevant with respect to
our business. It can also be difficult under the current market
conditions to identify orderly transactions between market par-
ticipants in similar financial services businesses. We assess the
valuation methodology based upon the relevance and availability
of data at the time of performing the valuation and weight the
methodologies appropriately.
Given the significant decline in our stock price in the first
quarter of 2009 and market conditions in the financial services
industry at that time, we conducted an additional impairment
analysis of the Capital Finance reporting units during the first
quarter of 2009 using data as of January 1, 2009. As a result of
these tests, no goodwill impairment was recognized.
We performed our annual impairment test for goodwill at all
of our reporting units in the third quarter using data as of July 1,
2009. In performing the valuations, we used cash flows that
reflected management’s forecasts and discount rates that reflect
the risks associated with the current market. Based on the results
of our testing, the fair values at each of the GE Industrial report-
ing units and the CLL, Consumer, Energy Financial Services and
GECAS reporting units exceeded their book values; therefore, the
second step of the impairment test (in which fair value of each
of the reporting unit’s assets and liabilities is measured) was not
required to be performed and no goodwill impairment was
recognized. Due to the volatility and uncertainties in the current
commercial real estate environment, we used a range of valuations
to determine the fair value for our Real Estate reporting unit.
While the Real Estate reporting unit’s book value was within the
range of its fair value, we further substantiated our Real Estate
goodwill balance by performing the second step analysis described
above. As a result of our tests for Real Estate, no goodwill
impairment was recognized. Our Real Estate reporting unit had
a goodwill balance of $1.2 billion at December 31, 2009.
Estimating the fair value of reporting units involves the use
of estimates and significant judgments that are based on a
number of factors including actual operating results. If current
conditions change from those expected, it is reasonably possible
that the judgments and estimates described above could change
in future periods.
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 impairment 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 8.