GE 2014 Annual Report Download - page 110

90 GE 2014 FORM 10-K
MD&A CRITICAL ACCOUNTING ESTIMATES
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. Significant judgment is required in determining our tax expense and in evaluating our tax
positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information
becomes available. Our income tax rate is significantly affected by the tax rate on our global operations. In addition to local
country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United
States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future
operations of the Company. At December 31, 2014 and 2013, approximately $119 billion and $110 billion of earnings,
respectively, have been indefinitely 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 indefinitely.
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 financial reporting and tax bases of assets and liabilities, as
well as from net operating loss and tax credit carryforwards. We evaluate 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
differences, 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 diversified business portfolio gives us the opportunity to employ various prudent and feasible tax planning
strategies to facilitate 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 at both December 31, 2014 and 2013, including $0.6 billion and
$0.8 billion at December 31, 2014 and 2013, respectively, of deferred tax assets, net of valuation allowances, associated with
losses reported in discontinued operations, primarily related to our loss on the sale of GE Money Japan. Such year-end 2014
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 Other Consolidated Information – Income Taxes section within the
MD&A and in Note 14 to the consolidated financial statements in this Form 10-K Report.
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 interpretations 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 qualifies 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 specified 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
valuation models incorporating market-based assumptions, subject to third-party confirmation, as applicable.
Further information about our use of derivatives is provided in Notes 1, 9, 21 and 22 to the consolidated financial statements in
this Form 10-K Report.