GE 2013 Annual Report Download - page 68

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66 GE 2013 ANNUAL REPORT
which is based upon cash fl ow estimates that refl ect current
and projected lease profi les and available industry information
about capitalization rates and expected trends in rents and occu-
pancy and is corroborated by external appraisals. During 2013,
Real Estate recognized pre-tax impairments of $0.3 billion in its
real estate held for investment, as compared to $0.1 billion in
2012. Deterioration in economic conditions or prolonged market
illiquidity may result in further impairments being recognized.
Furthermore, signifi cant judgment and uncertainty related to
forecasted valuation trends, especially in illiquid markets, result
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 Identifi ed Intangible Assets. We test good-
will 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 carrying
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 valuation.
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%.
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.
We review identifi ed intangible assets with defi ned use-
ful lives and subject to amortization for impairment whenever
events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Determining whether
an impairment loss occurred requires comparing the carrying
amount to the sum of undiscounted cash fl ows expected to be
generated by the asset. We test intangible assets with indefi nite
lives annually for impairment using a fair value method such as
discounted cash fl ows. For our insurance activities remaining in
continuing operations, we periodically test for impairment our
deferred acquisition costs and present value of future profi ts.
Further information is provided in the Financial Resources and
Liquidity—Goodwill and Other Intangible Assets section and in
Notes 1 and 8.
PENSION ASSUMPTIONS are signifi cant inputs to the actuarial
models that measure pension benefi t obligations and related
effects on operations. Two assumptions—discount rate and
expected return on assets—are important elements of plan
expense and asset/liability measurement. We evaluate these
critical assumptions at least annually on a plan and country-spe-
cifi c basis. We periodically evaluate other assumptions involving
demographic factors such as retirement age, mortality and
turnover, and update them to refl ect our experience and expec-
tations for the future. Actual results in any given year will often
differ from actuarial assumptions because of economic and
other factors.
Accumulated and projected benefi t obligations are measured
as the present value of expected payments. We discount those
cash payments using the weighted average of market-observed
yields for high-quality fi xed-income securities with maturities
that correspond to the payment of benefi ts. Lower discount rates
increase present values and subsequent-year pension expense;
higher discount rates decrease present values and subse-
quent-year pension expense.
Our discount rates for principal pension plans at December 31,
2013, 2012 and 2011 were 4.85%, 3.96% and 4.21%, respectively,
refl ecting market interest rates.
To determine the expected long-term rate of return on pen-
sion plan assets, we consider current and target asset allocations,
as well as historical and expected returns on various categories
of plan assets. In developing future long-term return expecta-
tions for our principal benefi t plans’ assets, we formulate views
on the future economic environment, both in the U.S. and abroad.
We evaluate general market trends and historical relation-
ships among a number of key variables that impact asset class
returns such as expected earnings growth, infl ation, valuations,
yields and spreads, using both internal and external sources.
We also take into account expected volatility by asset class and
diversifi cation across classes to determine expected overall
portfolio results given current and target allocations. Assets in
our principal pension plans earned 14.6% in 2013, and had aver-
age annual returns of 6.5%, 5.9% and 8.9% per year in the 10-,
15- and 25-year periods ended December 31, 2013, respectively.
These average historical returns were signifi cantly affected by