GE 2015 Annual Report Download - page 119

MD&A CRITICAL ACCOUNTING ESTIMATES
GE 2015 FORM 10-K 91
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, 20 and 27 to the consolidated financial statements.
FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value every reporting period include investments in debt and equity securities and derivatives.
Other assets and liabilities are subject to fair value measurements only in certain circumstances, including purchase accounting applied
to assets and liabilities acquired in a business combination, 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. Upon closing an acquisition, we estimate the fair values of assets and liabilities acquired and integrate the acquisition as soon
as practicable. The size, scope and complexity of an acquisition will affect the time it takes to obtain the necessary information to record
the acquired assets and liabilities at fair value. It may take up to one year to finalize the initial fair value estimates used in the
preliminary purchase accounting. Accordingly, it is reasonably likely that our initial estimates will be subsequently revised, which could
affect carrying amounts of goodwill, intangibles and potentially other assets and liabilities in our financial statements. Assets that are
written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities,
such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal
information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement
date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate
discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting
those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to
our asset being valued.
Further information on fair value measurements and related matters is provided in Notes 1, 8, 19, 20 and 27 to the consolidated
financial statements.
GE 2015 FORM 10-K 91