GE 2012 Annual Report Download - page 52

management’s discussion and analsis
50 GE 2012 ANNUAL REPORT
their backlogs over the next few years, progress collections of
$10.9 billion at December 31, 2012, will be earned, which, along
with progress collections on new orders, will impact working
capital. We discuss current receivables and inventories, two impor-
tant elements of working capital, in the following paragraphs.
CURRENT RECEIVABLES for GE totaled to $10.9 billion at the end
of 2012 and $11.8 billion at the end of 2011, and included $7.9 bil-
lion due from customers at the end of 2012 compared with
$9.0 billion at the end of 2011. GE current receivables turnover
was 8.8 in 2012, compared with 8.3 in 2011.
INVENTORIES for GE totaled to $15.3 billion at December 31, 2012,
up $1.6 billion from the end of 2011. This increase reflected higher
inventories across all industrial segments. GE inventory turnover
was 6.7 and 7.0 in 2012 and 2011, respectively. See Note 5.
FINANCING RECEIVABLES is our largest category of assets and
represents one of our primary sources of revenues. Our portfolio
of financing receivables is diverse and not directly comparable to
major U.S. banks. A discussion of the quality of certain elements
of the financing receivables portfolio follows.
Our consumer portfolio is composed primarily of non-U.S.
mortgage, sales finance, auto and personal loans in various
European and Asian countries and U.S. consumer credit card and
sales finance receivables. In 2007, we exited the U.S. mortgage
business and we have no U.S. auto or student loans.
Our commercial portfolio primarily comprises senior secured
positions with comparatively low loss history. The secured receiv-
ables in this portfolio are collateralized by a variety of asset
classes, which for our CLL business primarily include: industrial-
related facilities and equipment, vehicles, corporate aircraft,
and equipment used in many industries, including the construc-
tion, manufacturing, transportation, media, communications,
entertainment, and healthcare industries. The portfolios in our
Real Estate, GECAS and Energy Financial Services businesses
are collateralized by commercial real estate, commercial aircraft
and operating assets in the global energy and water industries,
respectively. We are in a secured position for substantially all of
our commercial portfolio.
Losses on financing receivables are recognized when they are
incurred, which requires us to make our best estimate of proba-
ble losses inherent in the portfolio. The method for calculating the
best estimate of losses depends on the size, type and risk char-
acteristics of the related financing receivable. Such an estimate
requires consideration of historical loss experience, adjusted for
current conditions, and judgments about the probable effects of
relevant observable data, including present economic conditions
such as delinquency rates, financial health of specific custom-
ers and market sectors, collateral values (including housing price
indices as applicable), and the present and expected future lev-
els of interest rates. The underlying assumptions, estimates and
assessments we use to provide for losses are updated periodi-
cally to reflect our view of current conditions and are subject to
the regulatory examinations process, which can result in changes
to our assumptions. Changes in such estimates can significantly
affect the allowance and provision for losses. It is possible to
experience credit losses that are different from our current
estimates.
Our risk management process includes standards and policies
for reviewing major risk exposures and concentrations, and eval-
uates relevant data either for individual loans or financing leases,
or on a portfolio basis, as appropriate.
Loans acquired in a business acquisition are recorded at fair
value, which incorporates our estimate at the acquisition date
of the credit losses over the remaining life of the portfolio. As a
result, the allowance for losses is not carried over at acquisition.
This may have the effect of causing lower reserve coverage ratios
for those portfolios.
For purposes of the discussion that follows, “delinquent”
receivables are those that are 30 days or more past due based
on their contractual terms; and “nonearning” receivables are
those that are 90 days or more past due (or for which collec-
tion is otherwise doubtful). Nonearning receivables exclude
loans purchased at a discount (unless they have deteriorated
post acquisition). Under Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 310, Receivables,
these loans are initially recorded at fair value and accrete interest
income over the estimated life of the loan based on reasonably
estimable cash flows even if the underlying loans are contractu-
ally delinquent at acquisition. In addition, nonearning receivables
exclude loans that are paying on a cash accounting basis but
classified as nonaccrual and impaired. “Nonaccrual” financing
receivables include all nonearning receivables and are those on
which we have stopped accruing interest. We stop accruing inter-
est at the earlier of the time at which collection of an account
becomes doubtful or the account becomes 90 days past due.
Recently restructured financing receivables are not considered
delinquent when payments are brought current according to the
restructured terms, but may remain classified as nonaccrual until
there has been a period of satisfactory payment performance
by the borrower and future payments are reasonably assured
of collection.
Further information on the determination of the allowance
for losses on financing receivables and the credit quality and cat-
egorization of our financing receivables is provided in the Critical
Accounting Estimates section and Notes 1, 6 and 23.