GE 2012 Annual Report Download - page 67

management’s discussion and analsis
GE 2012 ANNUAL REPORT 65
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
portfolio of commercial aircraft of $0.2 billion and $0.3 billion in
2012 and 2011, respectively. Provisions for losses on financing
receivables related to commercial aircraft were an insignificant
amount for both 2012 and 2011.
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 annually, or more frequently as condi-
tions warrant. 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 diver-
sified, both geographically and by asset type. However, the global
real estate market is subject to periodic cycles that can cause
significant fluctuations in market values. Based on the most
recent valuation estimates available, the carrying value of our
Real Estate investments exceeded their estimated value by about
$1.1 billion. This amount is subject to variation dependent on the
assumptions described above, changes in economic and market
conditions and composition of our portfolio, including sales.
Commercial real estate valuations have shown signs of improved
stability and liquidity in certain markets, primarily in the U.S.;
however, the pace of improvement varies significantly by asset
class and market. Accordingly, 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 undiscounted cash
flow estimates used in the estimated value measurement are
below the carrying amount. As such, estimated losses in the
portfolio will not necessarily result in recognized impairment
losses. When we recognize an impairment, 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 2012, Real
Estate recognized pre-tax impairments of $0.1 billion in its real
estate held for investment, as compared to $1.2 billion in 2011.
Continued deterioration in economic conditions or prolonged
market illiquidity may result in further impairments being recog-
nized. 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 good-
will for impairment annually and more frequently if circumstances
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 corroborate 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 busi-
ness. 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 rel-
evant 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 8.0% to 13.0%. Valuations
using the market approach reflect prices and other relevant
observable information generated by market transactions involv-
ing 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 offer-
ings. Required rates of return, along with uncertainty inherent
in the forecasts of future cash flows, are reflected in the selec-
tion 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 observable market price. A market approach allows for com-
parison 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 com-
panies 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 trans-
action, 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.
Estimating the fair value of reporting units requires the use of
estimates and significant judgments that are based on a number
of factors including actual operating results. If current conditions
persist longer or deteriorate further than expected, it is reason-
ably possible that the judgments and estimates described above
could change in future periods.