GE 2014 Annual Report Download - page 107

GE 2014 FORM 10-K 87
MD&A CRITICAL ACCOUNTING ESTIMATES
market values (obtained from third parties) of similar type and age aircraft, which are adjusted for the attributes of the specific
aircraft under lease.
We recognized impairment losses on our operating lease portfolio of commercial aircraft of $0.4 billion and $0.7 billion in 2014
and 2013, respectively. Impairment losses in 2014 primarily related to regional jets and older technology aircraft. The average
age of aircraft we impaired in 2014 was 17 years compared with 7 years for our total fleet. Provisions for losses on financing
receivables related to commercial aircraft were an insignificant amount for both 2014 and 2013.
Further information on impairment losses and our exposure to the commercial aviation industry is provided in Notes 7 and 24
to the consolidated financial statements in this Form 10-K Report.
REAL ESTATE
We review the estimated value of our commercial real estate investments annually, or more frequently as conditions warrant.
The cash flow estimates used for both estimating value and the recoverability analysis are inherently judgmental, and reflect
current and projected lease profiles, available industry 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
diversified, both geographically and by asset type. However, the global real estate market is subject to periodic cycles that can
cause significant fluctuations 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 $1.2 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. and Japan; however, the pace of improvement varies significantly 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 flow 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, which is based upon cash flow estimates that reflect current and projected lease profiles and
available industry information about capitalization rates and expected trends in rents and occupancy and is corroborated by
external appraisals. Real Estate recognized pre-tax impairments of $0.3 billion in its real estate held for investment in both
2014 and 2013. Deterioration in economic conditions or prolonged market illiquidity may result in further impairments being
recognized. Furthermore, significant 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 Risk Management section and in Note 9 to the consolidated financial statements in this
Form 10-K Report.
GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS
We test goodwill 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.