GE 2012 Annual Report Download - page 99

GE 2012 ANNUAL REPORT 97
notes to consolidated financial statements
Changes in goodwill balances follow.
2012 2011
(In millions)
Balance at
January 1 Acquisitions
Dispositions,
currency
exchange
and other
Balance at
December 31
Balance at
January 1 Acquisitions
Dispositions,
currency
exchange
and other
Balance at
December 31
Power & Water $ 8,769 $ — $ 52 $ 8,821 $ 8,632 $ 227 $ (90) $ 8,769
Oil & Gas 8,233 113 19 8,365 3,569 4,791 (127) 8,233
Energy Management 4,621 — (11) 4,610 1,136 3,928 (443) 4,621
Aviation 5,996 55 (76) 5,975 6,073 — (77) 5,996
Healthcare 16,631 221 (90) 16,762 16,338 305 (12) 16,631
Transportation 551 445 3 999 554 — (3) 551
Home & Business Solutions 594 11 6 611 578 24 (8) 594
GE Capital 27,230 — 74 27,304 27,508 6 (284) 27,230
Total $72,625 $845 $(23) $73,447 $64,388 $9,281 $(1,044) $72,625
Upon closing an acquisition, we estimate the fair values of assets
and liabilities acquired and consolidate the acquisition as quickly
as possible. Given the time it takes to obtain pertinent informa-
tion to finalize the acquired company’s balance sheet, then to
adjust the acquired company’s accounting policies, procedures,
and books and records to our standards, it is often several quar-
ters before we are able to finalize those initial fair value estimates.
Accordingly, it is not uncommon for our initial estimates to be
subsequently revised.
Goodwill balances increased $822 million in 2012, primarily as
a result of the weaker U.S. dollar ($356 million) and acquisitions
of Industrea Limited ($282 million) and Railcar Management, Inc.
($136 million) at Transportation.
On March 27, 2012, we contributed a portion of our civil avion-
ics systems business to a newly formed joint venture in exchange
for 50% of this entity. This resulted in deconsolidation of this busi-
ness and the recording of the interest in the new avionics joint
venture at fair value. As a result, we recognized a pre-tax gain of
$274 million ($152 million after tax) in the first quarter of 2012.
Goodwill balances increased $8,237 million in 2011, primar-
ily as a result of the acquisitions of Converteam ($3,411 million)
and Lineage Power Holdings, Inc. ($256 million) at Energy
Management and Dresser, Inc. ($1,932 million), the Well Support
division of John Wood Group PLC ($2,036 million) and Wellstream
PLC ($810 million) at Oil & Gas, partially offset by the stronger U.S.
dollar ($650 million).
On September 2, 2011, we purchased a 90% interest in
Converteam for $3,586 million. In connection with the transac-
tion, we entered into an arrangement to purchase the remaining
10% at the two-year anniversary of the acquisition date for
343 million euros (approximately $470 million). This amount was
recorded as a liability at the date of acquisition.
We test goodwill 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 corrob-
orate 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 business. 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
relevant 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