GE 2013 Annual Report Download - page 104

102 GE 2013 ANNUAL REPORT
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Goodwill balances increased $4,534 million in 2013, primarily
as a result of the acquisitions of Avio ($3,043 million) and Lufkin
($2,027 million), partially offset by dispositions.
Goodwill balances increased $817 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.
We test goodwill for impairment annually in the third quarter
of each year using data as of July 1 of that year. The impairment
test consists of two steps: in step one, the carrying value of the
reporting unit is compared with its fair value; in step two, which
is applied when the carrying value is more than its fair value, the
amount of goodwill impairment, if any, is derived by deducting
the fair value of the reporting unit’s assets and liabilities from the
fair value of its equity, and comparing that amount with the carry-
ing amount of goodwill. We determined fair values for each of the
reporting units using the market approach, when available and
appropriate, or the income approach, or a combination of both.
We assess the valuation methodology based upon the relevance
and availability of the data at the time we perform the valua-
tion. If multiple valuation methodologies are used, the results are
weighted appropriately.
Valuations using the market approach are derived from
metrics of publicly traded companies or historically completed
transactions of comparable businesses. The selection of compa-
rable businesses is based on the markets in which the reporting
units operate giving consideration to risk profi les, size, geogra-
phy, and diversity of products and services. A market approach is
limited to reporting units for which there are publicly traded com-
panies that have the characteristics similar to our businesses.
Under the income approach, fair value is determined based
on the present value of estimated future cash fl ows, discounted
at an appropriate risk-adjusted rate. We use our internal fore-
casts to estimate future cash fl ows 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 fi nancing. 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 16.5%.
During the third quarter of 2013, we performed our annual
impairment test of goodwill for all of our reporting units. Based
on the results of our step one testing, the fair values of each of
the GE reporting units exceeded their carrying values; therefore,
the second step of the impairment test was not required to be
performed and no goodwill impairment was recognized.
Our Real Estate reporting unit had a goodwill balance of
$742 million at December 31, 2013. While the Real Estate report-
ing unit’s book value was within the range of its fair value, we
further substantiated our Real Estate goodwill balance by per-
forming the second step analysis in which the implied fair value
of goodwill exceeded its carrying value by approximately $3.7 bil-
lion. The estimated fair value of the Real Estate reporting unit is
based on a number of assumptions about future business perfor-
mance and investment, including loss estimates for the existing
fi nance receivable and investment portfolio, new debt origina-
tion volume and margins, and the recent stabilization of the real
estate market allowing for sales of real estate investments at
normalized margins. Our assumed discount rate was 11.25%
and was derived by applying a capital asset pricing model and
corroborated using equity analyst research reports and implied
cost of equity based on forecasted price to earnings per share
multiples for similar companies. While we have seen stabiliza-
tion in some markets, given the volatility and uncertainty in the
current commercial real estate environment, there is uncertainty
about a number of assumptions upon which the estimated fair
value is based. Different loss estimates for the existing portfolio,
changes in the new debt origination volume and margin assump-
tions, changes in the expected pace of the commercial real estate
market recovery, or changes in the equity return expectation of
market participants may result in changes in the estimated fair
value of the Real Estate reporting unit.
Estimating the fair value of reporting units requires the use of
estimates and signifi cant judgments that are based on a number
of factors including actual operating results. It is reasonably pos-
sible that the judgments and estimates described above could
change in future periods.