notes to consolidated financial statements Note 1 Summary of Significant Accounting Policies Accounting principles Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Consolidation Our financial statements consolidate all of our affi liates companies that we control and in which we hold a majority voting interest. Associated companies are companies that we do not control but over which we have signifi cant infl uence, most often because we hold a shareholder voting position of 20% to 50%. Results of associated companies are presented on a one-line basis. Investments in and advances to associated companies are presented on a one-line basis in the caption “All other assets” in our Statement of Financial Position, net of allowance for losses that represents our best estimate of prob- able losses inherent in such assets. Financial statement presentation We have reclassified certain prior-year amounts to conform to the current year’s presentation. Financial data and related measurements are presented in the following categories: GE This represents the adding together of all affi liates other than General Electric Capital Services, Inc. (GECS), whose operations are presented on a one-line basis. GECS This affiliate owns all of the common stock of General Electric Capital Corporation (GE Capital). GE Capital and its respective affiliates are consolidated in the accompanying GECS columns and constitute the majority of its business. In 2005, most of GE Insurance Solutions Corporation (GE Insurance Solutions), formerly an affiliate of GECS, was classified as part of our discontinued insurance operations. See note 2. CONSOLIDATED This represents the adding together of GE and GECS. OPERATING SEGMENTS These comprise our six businesses focused on the broad markets they serve: Infrastructure, Commercial Finance, GE Money (formerly Consumer Finance), Healthcare, NBC Universal and Industrial. For segment reporting purposes, certain GECS businesses are included in the industrial operating segments that actively manage such businesses and report their results for internal performance measurement purposes. These include Aviation Financial Services, Energy Financial Services and Transportation Finance reported in the Infrastructure segment, and Equipment Services reported in the Industrial segment. Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. The effects of translating to U.S. dollars the fi nancial statements of non-U.S. affiliates whose functional currency is the local currency are included in shareowners’ equity. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the respective periods. Effects of transactions between related companies are elimi- nated. Transactions between GE and GECS are immaterial and consist primarily of GECS services for material procurement and trade receivables management buildings and equipment leased by GE from GECS information technology (IT) and other services sold to GECS by GE aircraft engines manufactured by GE that are installed on aircraft purchased by GECS from third-party producers for lease to others medical equipment manufactured by GE that is leased by GECS to others and various investments, loans and allocations of GE corporate overhead costs. Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Sales of goods and services We record sales when a firm sales agreement is in place, delivery has occurred or services have been rendered, and collectibility of the fixed or determinable sales price is reasonably assured. If customer acceptance of products is not assured, we record sales only upon formal customer acceptance. We expense costs to acquire or originate sales agreements as incurred. Sales of goods in the Industrial businesses typically do not include multiple product and/or services elements. In contrast, sales of goods in the Infrastructure and Healthcare businesses sometimes include multiple components and sometimes include a service component such as installation. In such contracts, amounts assigned to each component are based on that compo- nent’s objectively determined fair value, such as the sales price for the component when it is sold separately or competitor prices for similar components. We recognize sales of our delivered components only when such delivered components have value to the customer on a standalone basis, we have delivered all components essential to functionality and each of our undeliv- ered components has an objectively determined fair value. When undelivered performance obligations are inconsequential or per- functory and not essential to the functionality of the delivered components (like certain training commitments), we recognize sales on the total contract and make a provision for the cost of the unperformed obligations. We record sales of product services, certain power generation and turbo-machinery equipment, military aircraft engines, infor- mation technology projects and water treatment equipment in accordance with their respective contracts. For long-term product services agreements, we use estimated contract profit rates to record sales as work is performed. For other contracts, we use estimated contract profit rates to record sales as major compo- nents are completed and delivered to customers. Estimates are subject to revisions. Revisions that affect an agreement’s total estimated profitability result in an immediate adjustment of earnings. We provide for any loss when that loss is probable. 74 ge 2006 annual report
notes to consolidated financial statements NBC Universal, Inc. (NBC Universal) records broadcast and cable television and Internet advertising sales when advertise- ments are aired, net of provision for any viewer shortfalls (make goods). We record sales from theatrical distribution of fi lms as the films are exhibited sales of home videos, net of a return provision, when the videos are shipped and available for sale by retailers fees from cable and satellite operators when services are provided and licensing of film and television programming when we make the material available for airing. Consumer lighting products, home videos and computer hardware and software products are often sold with a right of return. Accumulated experience is used to estimate and provide for such returns when we record the sale. GECS revenues from services (earned income) We use the interest method to recognize income on all loans. Interest on loans includes origination, commitment and other non-refundable fees related to funding (recorded in earned income on the interest method). We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due. We recognize interest income on nonearning loans either as cash is collected or on a cost-recovery basis as conditions warrant. We resume accruing interest on nonearning, non-restructured commercial loans only when (a) payments are brought current according to the loan’s original terms and (b) future payments are reasonably assured. When we agree to restructured terms with the borrower, we resume accruing interest only when reasonably assured that we will recover full contractual payments, and such loans pass underwriting reviews equivalent to those applied to new loans. We resume accruing interest on nonearning consumer loans when the customer’s account is less than 90 days past due. We recognize financing lease income on the interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent our initial estimates of the fair value of the leased assets at the expiration of the lease and are based primarily on independent appraisals, which are updated periodically. Guarantees of residual values by unrelated third parties are considered part of minimum lease payments. Significant assumptions we use in estimating residual values include estimated net cash fl ows over the remaining lease term, anticipated results of future remarket- ing, and estimated future component part and scrap metal prices, discounted at an appropriate rate. We recognize operating lease income on a straight-line basis over the terms of underlying leases. Fees include commitment fees related to loans that we do not expect to fund and line-of-credit fees. We record these fees in earned income on a straight-line basis over the period to which they relate. We record syndication fees in earned income at the time related services are performed, unless signifi cant contingencies exist. Depreciation and amortization The cost of GE manufacturing plant and equipment is depreciated over its estimated economic life. U.S. assets are depreciated using an accelerated method based on a sum-of-the-years digits formula non-U.S. assets are depreciated on a straight-line basis. The cost of GECS equipment leased to others on operating leases is amortized on a straight-line basis to estimated residual value over the lease term or over the estimated economic life of the equipment. See note 15. NBC Universal film and television costs We defer film and television production costs, including direct costs, production overhead, development costs and interest. We do not defer costs of exploitation, which principally comprise costs of film and television program marketing and distribution. We amortize deferred film and television production costs, as well as associated participation and residual costs, on an individ- ual production basis using the ratio of the current period’s gross revenues to estimated total remaining gross revenues from all sources we state such costs at the lower of amortized cost or fair value. Estimates of total revenues and costs are based on anticipated release patterns, public acceptance and historical results for similar products. We defer the costs of acquired broadcast material, including rights to material for use on NBC Universal’s broadcast and cable networks, at the earlier of acqui- sition or when the license period begins and the material is available for use. We amortize acquired broadcast material and rights when we broadcast the associated programs we state such costs at the lower of amortized cost or net realizable value. Losses on financing receivables Our allowance for losses on fi nancing receivables represents our best estimate of probable losses inherent in the portfolio. Our method of calculating estimated losses depends on the size, type and risk characteristics of the related receivables. Write- offs are deducted from the allowance for losses and subsequent recoveries are added. Impaired financing receivables are written down to the extent that we judge principal to be uncollectible. Our portfolio consists entirely of homogenous consumer loans and of commercial loans and leases. The underlying assumptions, estimates and assessments we use to provide for losses are continually updated to reflect our view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates. Our consumer loan portfolio consists of smaller balance, homogenous loans including card receivables, installment loans, auto loans and leases and residential mortgages. We collectively evaluate each portfolio for impairment. The allowance for losses on these receivables is established through a process that estimates the probable losses inherent in the portfolio based upon statistical analyses of portfolio data. These analyses include migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, together with other analyses that reflect current trends and conditions. We also consider overall portfolio indicators including nonearning loans, trends in loan volume and lending terms, credit policies and other observable environmental factors. ge 2006 annual report 75
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