GE 2013 Annual Report Download - page 66

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64 GE 2013 ANNUAL REPORT
Variable Interest Entities
We securitize fi nancial assets and arrange other forms of
asset-backed fi nancing in the ordinary course of business as an
alternative source of funding. The securitization transactions we
engage in are similar to those used by many fi nancial institutions.
The assets we currently securitize include: receivables
secured by equipment, credit card receivables, fl oorplan inven-
tory receivables, GE trade receivables and other assets originated
and underwritten by us in the ordinary course of business.
The securitizations are funded with variable funding notes and
term debt.
Substantially all of our securitization VIEs are consolidated
because we are considered to be the primary benefi ciary of the
entity. Our interests in other VIEs for which we are not the pri-
mary benefi ciary are accounted for as investment securities,
fi nancing receivables or equity method investments depending
on the nature of our involvement.
At December 31, 2013, consolidated variable interest entity
assets and liabilities were $49.3 billion and $32.5 billion, respec-
tively, an increase of $0.9 billion and a decrease of $0.4 billion
from 2012. Assets held by these entities are of equivalent credit
quality to our other assets. We monitor the underlying credit
quality in accordance with our role as servicer and apply rigorous
controls to the execution of securitization transactions. With the
exception of credit and liquidity support discussed below, inves-
tors in these entities have recourse only to the underlying assets.
At December 31, 2013, investments in unconsolidated VIEs,
were $12.5 billion, a decrease of $0.2 billion from 2012, primarily
related to a decrease of $2.0 billion in PTL, partially offset by an
increase of $1.9 billion in an investment in asset-backed secu-
rities issued by a senior secured loan fund. In the fi rst quarter
of 2013, PTL had repaid all outstanding debt owed and termi-
nated its borrowing arrangement with GECC. During the second
quarter of 2013, PTL ceased to be a VIE as a result of a principal
in PTL retiring from the GE Board. Therefore, our investment in
PTL ($899 million at December 31, 2013) is not reported in the
December 31, 2013 balance. In addition to our existing invest-
ments, we have contractual obligations to fund additional
investments in the unconsolidated VIEs to fund new asset origi-
nation. At December 31, 2013, these contractual obligations were
$2.8 billion, an increase of $0.1 billion from 2012.
We do not have implicit support arrangements with any VIE.
We did not provide non-contractual support for previously trans-
ferred fi nancing receivables to any VIE in either 2013 or 2012.
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this sec-
tion are those that we consider to be the most critical to an
understanding of our fi nancial statements because they involve
signifi cant judgments and uncertainties. Many of these estimates
include determining fair value. All of these estimates refl ect our
best judgment about current, and for some estimates future,
economic and market conditions and their effects based on
information available as of the date of these fi nancial statements.
If these conditions change from those expected, it is reasonably
possible that the judgments and estimates described below could
change, which may result in future impairments of investment
securities, goodwill, intangibles and long-lived assets, incre-
mental losses on fi nancing receivables, increases in reserves for
contingencies, establishment of valuation allowances on deferred
tax assets and increased tax liabilities, among other effects. Also
see Note 1, which discusses the signifi cant accounting policies
that we have selected from acceptable alternatives.
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 fi nancing 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, fi nancial health of specifi c customers
and market sectors, collateral values (including housing price
indices as applicable), and the present and expected future levels
of interest rates. The underlying assumptions, estimates and
assessments we use to provide for losses are updated periodi-
cally to refl ect our view of current conditions and are subject to
the regulatory examination process, which can result in changes
to our assumptions. Changes in such estimates can signifi cantly
affect the allowance and provision for losses. It is possible that we
will experience credit losses that are different from our current
estimates. Write-offs in both our consumer and commercial port-
folios can also refl ect both losses that are incurred subsequent to
the beginning of a fi scal year and information becoming available
during that fi scal year that may identify further deterioration on
exposures existing prior to the beginning of that fi scal year, and
for which reserves could not have been previously recognized.
Our risk management process includes standards and policies for
reviewing major risk exposures and concentrations, and evalu-
ates relevant data either for individual loans or fi nancing leases,
or on a portfolio basis, as appropriate.
Further information is provided in the Global Risk
Management section and Financial Resources and Liquidity—
Financing Receivables section, the Asset Impairment section that
follows and in Notes 1 and 6.
REVENUE RECOGNITION ON LONG-TERM PRODUCT SERVICES
AGREEMENTS requires estimates of profi ts over the multiple-year
terms of such agreements, considering factors such as the
frequency and extent of future monitoring, maintenance and
overhaul events; the amount of personnel, spare parts and other
resources required to perform the services; and future billing
rate and cost changes. We routinely review estimates under
product services agreements and regularly revise them to adjust
for changes in outlook. We also regularly assess customer credit
risk inherent in the carrying amounts of receivables and contract
costs and estimated earnings, including the risk that contractual
penalties may not be suffi cient to offset our accumulated invest-
ment in the event of customer termination. We gain insight into
future utilization and cost trends, as well as credit risk, through
our knowledge of the installed base of equipment and the close
interaction with our customers that comes with supplying critical