GE 2011 Annual Report Download - page 85

GE 2011 ANNUAL REPORT 83
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While we are 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 reviews
also include an examination of the underlying inputs and assump-
tions for a sample of individual securities across asset classes,
credit rating levels and various durations, a process we perform
each reporting period. In addition, the pricing vendor has an
established challenge process in place for all security valuations,
which facilitates identifi cation and resolution of potentially erro-
neous 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 classifi ed
appropriately in the hierarchy.
We use non-binding broker quotes and other third-party
pricing services as our primary basis for valuation when there
is limited, or no, relevant market activity for a specifi c instru-
ment 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 and other
third-party pricing services are included in Level 3. As is the case
with our primary pricing vendor, third-party brokers and other
third-party pricing services do not provide access to their pro-
prietary valuation models, inputs and assumptions. Accordingly,
our risk management personnel conduct reviews of vendors, as
applicable, similar to the reviews performed of our primary pric-
ing vendor. In addition, we conduct internal reviews of pricing for
all such investment securities quarterly to ensure reasonable-
ness of valuations used in our fi nancial statements. These reviews
are designed to identify prices that appear stale, those that have
changed signifi cantly 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 and other third-party pricing services are represen-
tative of prices that would be received to sell the assets at the
measurement date (exit prices).
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 equity derivatives and interest rate products that con-
tain embedded optionality 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
circumstances. 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 invest-
ments 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.
The following describes the valuation methodologies we use
to measure fi nancial and non-fi nancial instruments accounted for
at fair value on a non-recurring basis and for certain assets within
our pension plans and retiree benefi t 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 may be valued using collateral
values as a practical expedient (see Long-Lived Assets below).
COST AND EQUITY METHOD INVESTMENTS. Cost and equity method
investments are valued using market observable data such as
quoted prices when available. When market observable data is
unavailable, investments are valued using a discounted cash fl ow
model, comparative market multiples or a combination of both
approaches as appropriate and other third-party pricing sources.
These investments are generally included in Level 3.
Investments in private equity, real estate and collective funds
are valued using net asset values. The net asset values are deter-
mined based on the fair values of the underlying investments in
the funds. Investments in private equity and real estate funds are
generally included in Level 3 because they are not redeemable
at the measurement date. Investments in collective funds are
included in Level 2.
LONG-LIVED ASSETS. Fair values of long-lived assets, including
aircraft and real estate, are primarily derived internally and are
based on observed sales transactions for similar assets. In other
instances, for example, collateral types for which we do not have
comparable observed sales transaction data, collateral values are
developed internally and corroborated by external appraisal
information. Adjustments to third-party valuations may be per-
formed in circumstances where market comparables are not
specifi c to the attributes of the specifi c collateral or appraisal
information may not be refl ective of current market conditions
due to the passage of time and the occurrence of market events
since receipt of the information. For real estate, fair values are