GE 2010 Annual Report Download - page 65

management’s discussion and analsis
GE 2010 ANNUAL REPORT 63
long-term expected return on those assets for cost recognition in
2011. This is a reduction from the 8.5% we had assumed in 2010,
2009 and 2008.
Changes in key assumptions for our principal pension plans
would have the following effects:
• Discount rate—A 25 basis point increase in discount rate would
decrease pension cost in the following year by $0.2 billion and
would decrease the pension benefit obligation at year-end by
about $1.5 billion.
• Expected return on assets—A 50 basis point decrease in the
expected return on assets would increase pension cost in
the following year by $0.2 billion.
Further information on our pension plans is provided in the
Operations—Overview section and in Note 12.
INCOME TAXES. Our annual tax rate is based on our income,
statutory tax rates and tax planning opportunities available to
us in the various jurisdictions in which we operate. Tax laws are
complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant
judgment is required in determining our tax expense and in
evaluating our tax positions, including evaluating uncertainties.
We review our tax positions quarterly and adjust the balances
as new information becomes available. Our income tax rate is
significantly affected by the tax rate on our global operations.
In addition to local country tax laws and regulations, this rate
depends on the extent earnings are indefinitely reinvested
outside the United States. Indefinite reinvestment is determined
by management’s judgment about and intentions concerning
the future operations of the company. At December 31, 2010,
$94 billion of earnings have been indefinitely reinvested outside
the United States. Most of these earnings have been reinvested
in active non-U.S. business operations, and we do not intend to
repatriate these earnings to fund U.S. operations. Because of the
availability of U.S. foreign tax credits, it is not practicable to
determine the U.S. federal income tax liability that would be
payable if such earnings were not reinvested indefinitely.
Deferred income tax assets represent amounts available to
reduce income taxes payable on taxable income in future years.
Such assets arise because of temporary differences between
the financial reporting and tax bases of assets and liabilities, as
well as from net operating loss and tax credit carryforwards. We
evaluate the recoverability of these future tax deductions and
credits by assessing the adequacy of future expected taxable
income from all sources, including reversal of taxable temporary
differences, forecasted operating earnings and available tax
planning strategies. These sources of income rely heavily on
estimates. We use our historical experience and our short- and
long-range business forecasts to provide insight. Further, our
global and diversified business portfolio gives us the opportu-
nity to employ various prudent and feasible tax planning
strategies to facilitate the recoverability of future deductions.
Amounts recorded for deferred tax assets related to non-U.S.
net operating losses, net of valuation allowances, were
$4.4 billion and $3.6 billion at December 31, 2010 and 2009,
respectively, including $1.0 billion and $1.3 billion at
December 31, 2010 and 2009, respectively, of deferred tax
assets, net of valuation allowances, associated with losses
reported in discontinued operations, primarily related to our loss
on the sale of GE Money Japan. Such year-end 2010 amounts
are expected to be fully recoverable within the applicable statu-
tory expiration periods. To the extent we do not consider it more
likely than not that a deferred tax asset will be recovered, a
valuation allowance is established.
Further information on income taxes is provided in the
Operations—Overview section and in Note 14.
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 interpre-
tations 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, as applicable.
At December 31, 2010, derivative assets and liabilities were
$7.5 billion and $2.8 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 mea-
sured 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 writ-
ten down to fair value when they are impaired and the
remeasurement of retained investments in formerly consoli-
dated 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 invest-
ments are not subsequently adjusted to fair value unless further
impairment occurs.