GE 2014 Annual Report Download - page 106

86 GE 2014 FORM 10-K
MD&A CRITICAL ACCOUNTING ESTIMATES
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 sufficient to offset our accumulated investment 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
services and parts over extended periods. Revisions may affect a product services agreement’s total estimated profitability
resulting in an adjustment of earnings; such adjustments increased earnings by $1.0 billion, $0.3 billion and $0.4 billion in
2014, 2013 and 2012, respectively. We provide for probable losses when they become evident.
Further information is provided in Notes 1 and 9 to the consolidated financial statements in this Form 10-K Report.
ASSET IMPAIRMENT
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 qualitative criteria to determine whether a credit loss exists, such as the financial
health of and specific 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
flows. 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 finance, 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 to the consolidated financial statements in this Form 10-K Report, which discusses the determination of fair value of
investment securities.
Further information about actual and potential impairment losses is provided in Notes 1, 3 and 9 to the consolidated financial
statements in this Form 10-K Report.
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 various estimates and
assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the
useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an
impairment loss requires a determination of fair value, which is based on the best information available. We derive the required
undiscounted cash flow estimates from our historical experience and our internal business plans. To determine fair value, we
use quoted market prices when available, our internal cash flow estimates discounted at an appropriate interest rate and
independent appraisals, as appropriate.
Our operating lease portfolio of commercial aircraft is a significant concentration of assets in GE Capital, and is particularly
subject to market fluctuations. 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 specific lessee’s credit standing changes. We consider 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 flows 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