GE 2010 Annual Report Download - page 80

78 GE 2010 ANNUAL REPORT
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management personnel conduct internal reviews of pricing for all
such investment securities quarterly to ensure reasonableness of
valuations used in our financial statements. These reviews are
designed to identify prices that appear stale, those that have
changed significantly from prior valuations, and other anomalies
that may indicate that a price may not be accurate. Based on the
information available, we believe that the fair values provided by
the brokers are representative of prices that would be received to
sell the assets at the measurement date (exit prices).
Retained interests in securitizations are valued using a dis-
counted cash flow model that considers the underlying structure
of the securitization and estimated net credit exposure, prepay-
ment assumptions, discount rates and expected life.
DERIVATIVES. We use closing prices for derivatives included in
Level 1, which are traded either on exchanges or liquid over-the-
counter markets.
The majority of our derivatives are valued using internal mod-
els. The models maximize the use of market observable inputs
including interest rate curves and both forward and spot prices
for currencies and commodities. Derivative assets and liabilities
included in Level 2 primarily represent interest rate swaps, cross-
currency swaps and foreign currency and commodity forward
and option contracts.
Derivative assets and liabilities included in Level 3 primarily
represent interest rate products that contain embedded optional-
ity or prepayment features.
Non-Recurring Fair Value Measurements.
Certain assets are measured at fair value on a non-recurring basis.
These assets are not measured at fair value on an ongoing basis,
but are subject to fair value adjustments only in certain circum-
stances. These assets can 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 invest-
ments 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.
The following describes the valuation methodologies we use
to measure financial and non-financial instruments accounted for
at fair value on a non-recurring basis and for assets within our
pension plans and retiree benefit plans at each reporting period,
as applicable.
LOANS. When available, we use observable market data, including
pricing on recent closed market transactions, to value loans that
are included in Level 2. When this data is unobservable, we use
valuation methodologies using current market interest rate data
adjusted for inherent credit risk, and such loans are included in
Level 3. When appropriate, loans are valued using collateral val-
ues as a practical expedient (see Long-Lived Assets below).
independent price validation for certain instruments. Further, in
other instances, we retain independent pricing vendors to assist
in valuing certain instruments.
The following section describes the valuation methodologies
we use to measure different financial instruments at fair value on
a recurring basis.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. When available,
we use quoted market prices to determine the fair value of
investment securities, and they are included in Level 1. Level 1
securities primarily include publicly-traded equity securities.
When quoted market prices are unobservable, we obtain
pricing information from an independent pricing vendor. The
pricing vendor uses various pricing models for each asset class
that are consistent with what other market participants would
use. The inputs and assumptions to the model of the pricing
vendor are derived from market observable sources including:
benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, benchmark securities, bids, offers, and other market-
related data. Since many fixed income securities do not trade on
a daily basis, the methodology of the pricing vendor uses avail-
able information as applicable such as benchmark curves,
benchmarking of like securities, sector groupings, and matrix
pricing. The pricing vendor considers available market observ-
able inputs in determining the evaluation for a security. Thus,
certain securities may not be priced using quoted prices, but
rather determined from market observable information. These
investments are included in Level 2 and primarily comprise our
portfolio of corporate fixed income, and government, mortgage
and asset-backed securities. In infrequent circumstances, our
pricing vendors may provide us with valuations that are based
on significant unobservable inputs, and in those circumstances
we classify the investment securities in Level 3.
Annually, we conduct reviews of our primary pricing vendor
to validate that the inputs used in that vendor’s pricing process
are deemed to be market observable as defined in the standard.
While we were not provided access to proprietary models of the
vendor, our reviews have included on-site walk-throughs of the
pricing process, methodologies and control procedures for each
asset class and level for which prices are provided. Our review
also included an examination of the underlying inputs and
assumptions for a sample of individual securities across asset
classes, credit rating levels and various durations, a process we
continue to perform for each reporting period. In addition, the
pricing vendor has an established challenge process in place for
all security valuations, which facilitates identification and resolu-
tion of potentially erroneous prices. We believe that the prices
received from our pricing vendor are representative of prices that
would be received to sell the assets at the measurement date
(exit prices) and are classified appropriately in the hierarchy.
We use non-binding broker quotes as our primary basis for
valuation when there is limited, or no, relevant market activity for
a specific instrument or for other instruments that share similar
characteristics. We have not adjusted the prices we have obtained.
Investment securities priced using non-binding broker quotes are
included in Level 3. As is the case with our primary pricing vendor,
third-party brokers do not provide access to their proprietary
valuation models, inputs and assumptions. Accordingly, our risk