GE 2013 Annual Report Download - page 67

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GE 2013 ANNUAL REPORT 65
services and parts over extended periods. Revisions that affect a
product services agreement’s total estimated profi tability result
in an adjustment of earnings; such adjustments increased earn-
ings by $0.3 billion, $0.4 billion and $0.4 billion in 2013, 2012 and
2011, respectively. We provide for probable losses when they
become evident.
Further information is provided in Notes 1 and 9.
ASSET IMPAIRMENT assessment involves various estimates and
assumptions as follows:
Investments. We regularly review investment securities for
impairment using both quantitative and qualitative criteria. For
debt securities, if we do not intend to sell the security and it is not
more likely than not that we will be required to sell the security
before recovery of our amortized cost, we evaluate other qualita-
tive criteria to determine whether a credit loss exists, such as the
fi nancial health of and specifi c prospects for the issuer, including
whether the issuer is in compliance with the terms and covenants
of the security. Quantitative criteria include determining whether
there has been an adverse change in expected future cash fl ows.
For equity securities, our criteria include the length of time and
magnitude of the amount that each security is in an unrealized
loss position. Our other-than-temporary impairment reviews
involve our fi nance, risk and asset management functions as well
as the portfolio management and research capabilities of our
internal and third-party asset managers. See Note 1, which dis-
cusses the determination of fair value of investment securities.
Further information about actual and potential impairment
losses is provided in the Financial Resources and Liquidity—
Investment Securities section and in Notes 1, 3 and 9.
Long-Lived Assets. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Determining
whether an impairment has occurred typically requires vari-
ous estimates and assumptions, including determining which
undiscounted cash fl ows are directly related to the potentially
impaired asset, the useful life over which cash fl ows will occur,
their amount, and the asset’s residual value, if any. In turn, mea-
surement of an impairment loss requires a determination of fair
value, which is based on the best information available. We derive
the required undiscounted cash fl ow estimates from our histori-
cal experience and our internal business plans. To determine fair
value, we use quoted market prices when available, our internal
cash fl ow estimates discounted at an appropriate interest rate
and independent appraisals, as appropriate.
Our operating lease portfolio of commercial aircraft is a sig-
nifi cant concentration of assets in GE Capital, and is particularly
subject to market fl uctuations. Therefore, we test recoverability
of each aircraft in our operating lease portfolio at least annually.
Additionally, we perform quarterly evaluations in circumstances
such as when aircraft are re-leased, current lease terms have
changed or a specifi c lessee’s credit standing changes. We con-
sider market conditions, such as global demand for commercial
aircraft. Estimates of future rentals and residual values are based
on historical experience and information received routinely
from independent appraisers. Estimated cash fl ows from future
leases are reduced for expected downtime between leases and
for estimated technical costs required to prepare aircraft to be
redeployed. Fair value used to measure impairment is based on
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 specifi c aircraft under lease.
We recognized impairment losses on our operating lease
portfolio of commercial aircraft of $0.7 billion and $0.2 billion in
2013 and 2012, respectively. Impairment losses in 2013 incorpo-
rated management’s downward revisions to cash fl ow estimates
based upon shorter useful lives and lower aircraft residual values
from those indicated by our third-party appraisers, refl ecting the
introduction of newer technology, fl eet retirements and high fuel
prices and operating costs. These revised estimates primarily
related to cargo aircraft ($0.3 billion), older technology narrow-body
aircraft ($0.2 billion) and regional jets ($0.1 billion). The average
age of aircraft we impaired in 2013 was 15 years compared with
seven years for our total fl eet. Provisions for losses on fi nancing
receivables related to commercial aircraft were an insignifi cant
amount for both 2013 and 2012.
Further information on impairment losses and our exposure to
the commercial aviation industry is provided in the Operations—
Overview of Our Earnings from 2011 through 2013 and the
Financial Resources and Liquidity—Property, plant and equipment
sections and in Notes 7 and 24.
Real Estate. We review the estimated value of our commercial
real estate investments annually, or more frequently as condi-
tions warrant. The cash fl ow estimates used for both estimating
value and the recoverability analysis are inherently judgmental,
and refl ect current and projected lease profi les, available indus-
try 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-
sifi ed, both geographically and by asset type. However, the global
real estate market is subject to periodic cycles that can cause
signifi cant fl uctuations 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
$2.1 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 signifi cantly 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 fl ow 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,