GE 2009 Annual Report Download - page 59

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’   
GE 2009 ANNUAL REPORT 57
DERIVATIVES AND HEDGING. We use derivatives to manage a
variety of risks, including risks related to interest rates, foreign
exchange and commodity prices. Accounting for derivatives as
hedges requires that, at inception and over the term of the
arrangement, the hedged item and related derivative meet the
requirements for hedge accounting. The rules and interpretations
related to derivatives accounting are complex. Failure to apply this
complex guidance correctly will result in all changes in the fair
value of the derivative being reported in earnings, without regard
to the offsetting changes in the fair value of the hedged item.
In evaluating whether a particular relationship qualifies for
hedge accounting, we test effectiveness at inception and each
reporting period thereafter by determining whether changes in
the fair value of the derivative offset, within a specified range,
changes in the fair value of the hedged item. If fair value changes
fail this test, we discontinue applying hedge accounting to that
relationship prospectively. Fair values of both the derivative
instrument and the hedged item are calculated using internal
valuation models incorporating market-based assumptions,
subject to third-party confirmation.
At December 31, 2009, derivative assets and liabilities were
$8.0 billion and $3.7 billion, respectively. Further information
about our use of derivatives is provided in Notes 1, 9, 21 and 22.
FAIR VALUE MEASUREMENTS. Assets and liabilities measured at fair
value every reporting period include investments in debt and
equity securities and derivatives. Assets that are not measured
at fair value every reporting period but that are subject to fair
value measurements in certain circumstances include loans and
long-lived assets that have been reduced to fair value when they
are held for sale, impaired loans that have been reduced based
on the fair value of the underlying collateral, cost and equity
method investments and long-lived assets that are written down
to fair value when they are impaired and the remeasurement of
retained investments in formerly consolidated subsidiaries upon
a change in control that results in deconsolidation of a subsidiary,
if we sell a controlling interest and retain a noncontrolling stake
in the entity. Assets that are written down to fair value when
impaired and retained investments are not subsequently adjusted
to fair value unless further impairment occurs.
A fair value measurement is determined as the price we would
receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement
date. In the absence of active markets for the identical assets or
liabilities, such measurements involve developing assumptions
based on market observable data and, in the absence of such
data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs
at the measurement date. The determination of fair value often
involves significant judgments about assumptions such as deter-
mining an appropriate discount rate that factors in both risk and
liquidity premiums, identifying the similarities and differences in
market transactions, weighting those differences accordingly
and then making the appropriate adjustments to those market
transactions to reflect the risks specific to our asset being valued.
Further information on fair value measurements is provided in
Notes 1, 21 and 22.
OTHER LOSS CONTINGENCIES are recorded as liabilities when it is
probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Disclosure is required when there is a
reasonable possibility that the ultimate loss will materially exceed
the recorded provision. Contingent liabilities are often resolved
over long time periods. Estimating probable losses requires analy-
sis of multiple forecasts that often depend on judgments about
potential actions by third parties, such as regulators.
Further information is provided in Notes 13 and 24.