GE 2013 Annual Report Download - page 69

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GE 2013 ANNUAL REPORT 67
investment losses in 2008. Based on our analysis of future expec-
tations of asset performance, past return results, and our current
and target asset allocations, we have assumed a 7.5% long-term
expected return on those assets for cost recognition in 2014. This
is a reduction from the 8.0% we assumed in 2013, 2012 and 2011.
Changes in key assumptions for our principal pension plans
would have the following effects.
• Discount rate—A 25 basis point increase in discount rate
would decrease pension cost in the following year by
$0.2 billion and would decrease the pension benefi t obliga-
tion at year-end by about $1.7 billion.
• Expected return on assets—A 50 basis point decrease in the
expected return on assets would increase pension cost in the
following year by $0.2 billion.
Further information on our pension plans is provided in the
Operations—Overview section and in Note 12.
INCOME TAXES. Our annual tax rate is based on our income,
statutory tax rates and tax planning opportunities available
to us in the various jurisdictions in which we operate. Tax
laws are complex and subject to different interpretations by
the taxpayer and respective governmental taxing authorities.
Signifi cant judgment is required in determining our tax expense
and in evaluating our tax positions, including evaluating uncer-
tainties. We review our tax positions quarterly and adjust the
balances as new information becomes available. Our income tax
rate is signifi cantly affected by the tax rate on our global opera-
tions. In addition to local country tax laws and regulations, this
rate depends on the extent earnings are indefi nitely reinvested
outside the United States. Indefi nite reinvestment is determined
by management’s judgment about and intentions concerning
the future operations of the Company. At December 31, 2013
and 2012, approximately $110 billion and $108 billion of earnings,
respectively, have been indefi nitely reinvested outside the United
States. Most of these earnings have been reinvested in active
non-U.S. business operations, and we do not intend to repatriate
these earnings to fund U.S. operations. Because of the availability
of U.S. foreign tax credits, it is not practicable to determine the
U.S. federal income tax liability that would be payable if such
earnings were not reinvested indefi nitely.
Deferred income tax assets represent amounts available to
reduce income taxes payable on taxable income in future years.
Such assets arise because of temporary differences between the
fi nancial reporting and tax bases of assets and liabilities, as well
as from net operating loss and tax credit carryforwards. We eval-
uate the recoverability of these future tax deductions and credits
by assessing the adequacy of future expected taxable income
from all sources, including reversal of taxable temporary differ-
ences, forecasted operating earnings and available tax planning
strategies. These sources of income rely heavily on estimates.
We use our historical experience and our short- and long-range
business forecasts to provide insight. Further, our global and
diversifi ed business portfolio gives us the opportunity to employ
various prudent and feasible tax planning strategies to facili-
tate the recoverability of future deductions. Amounts recorded
for deferred tax assets related to non-U.S. net operating losses,
net of valuation allowances, were $5.5 billion and $4.8 billion at
December 31, 2013 and 2012, respectively, including $0.8 billion
at both December 31, 2013 and 2012 of deferred tax assets, net
of valuation allowances, associated with losses reported in dis-
continued operations, primarily related to our loss on the sale of
GE Money Japan. Such year-end 2013 amounts are expected to
be fully recoverable within the applicable statutory expiration
periods. To the extent we do not consider it more likely than not
that a deferred tax asset will be recovered, a valuation allowance
is established.
Further information on income taxes is provided in the
Operations—Overview section and in Note 14.
DERIVATIVES AND HEDGING. We use derivatives to manage a
variety of risks, including risks related to interest rates, foreign
exchange and commodity prices. Accounting for derivatives
as hedges requires that, at inception and over the term of the
arrangement, the hedged item and related derivative meet the
requirements for hedge accounting. The rules and interpreta-
tions related to derivatives accounting are complex. Failure to
apply this complex guidance correctly will result in all changes
in the fair value of the derivative being reported in earnings,
without regard to the offsetting changes in the fair value of the
hedged item.
In evaluating whether a particular relationship qualifi es for
hedge accounting, we test effectiveness at inception and each
reporting period thereafter by determining whether changes in
the fair value of the derivative offset, within a specifi ed range,
changes in the fair value of the hedged item. If fair value changes
fail this test, we discontinue applying hedge accounting to that
relationship prospectively. Fair values of both the derivative
instrument and the hedged item are calculated using internal val-
uation models incorporating market-based assumptions, subject
to third-party confi rmation, as applicable.
At December 31, 2013, derivative assets and liabilities were
$1.0 billion and $1.3 billion, respectively. Further information
about our use of derivatives is provided in Notes 1, 9, 21 and 22.
FAIR VALUE MEASUREMENTS. Assets and liabilities measured at
fair value every reporting period include investments in debt and
equity securities and derivatives. Assets that are not measured
at fair value every reporting period, but that are subject to fair
value measurements in certain circumstances, include loans and
long-lived assets that have been reduced to fair value when they
are held for sale, impaired loans that have been reduced based on
the fair value of the underlying collateral, cost and equity method
investments and long-lived assets that are written down to fair
value when they are impaired and the remeasurement of retained
investments in formerly consolidated subsidiaries upon a change
in control that results in deconsolidation of a subsidiary, if we
sell a controlling interest and retain a noncontrolling stake in the
entity. Assets that are written down to fair value when impaired
and retained investments are not subsequently adjusted to fair
value unless further impairment occurs.