GE 2010 Annual Report Download - page 63

management’s discussion and analsis
GE 2010 ANNUAL REPORT 61
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 port-
folio of commercial aircraft of $0.4 billion and $0.1 billion in 2010
and 2009, respectively. Provisions for losses on financing receiv-
ables related to commercial aircraft were insignificant and
$0.1 billion in 2010 and 2009, respectively.
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 25.
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 geographi-
cally 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
2010, the carrying value of our Real Estate investments exceeded
their estimated value by about $5.1 billion. The estimated value
of the portfolio continues to reflect deterioration in real estate
values and market fundamentals, including reduced market
occupancy rates and market rents as well as the effects of
limited real estate market liquidity. Given the current and
expected challenging market conditions, there continues to be
risk and uncertainty surrounding commercial real estate values.
Declines in the estimated value of real estate below carrying
amount result in impairment losses when the aggregate undis-
counted cash flow estimates used in the estimated value
measurement are below the carrying amount. As such, esti-
mated losses in the portfolio will not necessarily result in
recognized impairment losses. When we recognize an impair-
ment, the impairment is measured using the estimated fair
value of the underlying asset, which is based upon cash flow
estimates that reflect current and projected lease profiles
and available industry information about capitalization rates and
expected trends in rents and occupancy and is corroborated
by external appraisals. During 2010, Real Estate recognized
pre-tax impairments of $2.3 billion in its real estate held for
investment, as compared to $0.8 billion in 2009. Continued
deterioration in economic conditions or prolonged market illi-
quidity 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 and the
All Other Assets sections and in Note 9.
Goodwill and Other Identified Intangible Assets. We test
goodwill for impairment annually and more frequently if circum-
stances warrant. We determine fair values for each of the
reporting units using an income approach. When available and
appropriate, we use comparative market multiples to corrobo-
rate 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 using a capital
asset pricing model and analyzing published rates for industries
relevant to our reporting units to estimate the cost of equity
financing. We use discount rates that are commensurate with
the risks and uncertainty inherent in the respective businesses
and in our internally developed forecasts. Discount rates used
in our reporting unit valuations ranged from 9% to 14.5%.
Valuations using the market approach reflect prices and other
relevant observable information generated by market transac-
tions involving comparable businesses.
Compared to the market approach, the income approach more
closely aligns each reporting unit valuation to our business profile,
including geographic markets served and product offerings.
Required rates of return, along with uncertainty inherent in the
fore casts 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 states that may not be reflected in an observ-
able market price. A market approach allows for comparison to
actual market transactions and multiples. It can be somewhat
more limited in its application because the population of potential
comparables 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 certain market conditions, to identify
orderly transactions between market participants in similar
businesses. We assess the valuation methodology based upon
the relevance and availability of the data at the time we per-
form the valuation and weight the methodologies appropriately.
We performed our annual impairment test of goodwill for all
of our reporting units in the third quarter using data as of July 1,
2010. The impairment test consists of two steps: in step one, the
carrying value of the reporting unit is compared with its fair value;
in step two, which is applied when the carrying value is more than
its fair value, the amount of goodwill impairment, if any, is derived
by deducting the fair value of the reporting unit’s assets and
liabilities from the fair value of its equity, and comparing that
amount with the carrying amount of goodwill. In performing the