GE 2014 Annual Report Download - page 108

88 GE 2014 FORM 10-K
MD&A CRITICAL ACCOUNTING ESTIMATES
Valuations using the market approach are derived from metrics of publicly traded companies or historically completed
transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the
reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market
approach is limited to reporting units for which there are publicly traded companies 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 flows, discounted at
an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows 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 financing. 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 9.0% to 16.0%.
During the third quarter of 2014, as noted above, we performed our annual impairment test of goodwill for all of our reporting
units. Based on the results of our step one testing, the fair values of each of the GE reporting units exceeded their carrying
values; therefore, the second step of the impairment test was not required to be performed for any of our reporting units and
no goodwill impairment was recognized.
While all of our reporting units passed step one of our annual impairment testing, we identified one reporting unit for which the
fair value was not substantially in excess of its carrying value. Within our Energy Management operating segment, the Power
Conversion reporting unit was determined to have a fair value in excess of its carrying value by approximately 10%. The
goodwill associated with the Power Conversion reporting unit was $1.5 billion at December 31, 2014, representing
approximately 2% of our total goodwill. While the goodwill of the reporting unit is not currently impaired, there could be an
impairment in the future as a result of changes in certain estimates and assumptions. For example, the reporting unit’s fair
value could be adversely affected and result in an impairment of goodwill if actual cash flows are below estimated cash flows,
the estimated cash flows are discounted at a higher risk-adjusted rate or market multiples decrease.
As of December 31, 2014, we believe that the goodwill is recoverable for all of the reporting units; however, there can be no
assurances that the goodwill will not be impaired in future periods.
In 2013, while the Real Estate reporting unit’s book value was within the range of its fair value, we further substantiated our
Real Estate goodwill balance by performing the second step analysis in which the implied fair value of goodwill exceeded its
carrying value by approximately $3.7 billion. In the current year, it was determined that the second step was not required, as
the results of step one indicated that the fair value of the Real Estate reporting unit exceeded its book value.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number
of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could
change in future periods.
We review identified intangible assets with defined useful 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 flows expected to be
generated by the asset. We test intangible assets with indefinite lives annually for impairment using a fair value method such
as discounted cash flows. For our insurance activities remaining in continuing operations, we periodically test for impairment
our deferred acquisition costs and present value of future profits.
Further information is provided in Notes 1 and 8 to the consolidated financial statements in this Form 10-K Report.