notes to consolidated financial statements We write off unsecured closed-end installment loans at 120 days contractually past due and unsecured open-ended revolving loans at 180 days contractually past due. We write down consumer loans secured by collateral other than residential real estate to the fair value of the collateral, less costs to sell, when such loans are 120 days past due. Consumer loans secured by residential real estate (both revolving and closed-end loans) are written down to the fair value of collateral, less costs to sell, no later than when they become 360 days past due. Unsecured consumer loans in bankruptcy are written off within 60 days of notification of filing by the bankruptcy court or within contractual write-off periods, whichever occurs earlier. Our commercial loan and lease portfolio consists of a variety of loans and leases, including both larger balance, non-homogenous loans and leases and smaller balance homogenous commercial and equipment loans and leases. Losses on such loans and leases are recorded when probable and estimable. We routinely survey our entire portfolio for potential specific credit or collec- tion issues that might indicate an impairment. For larger balance, non-homogenous loans and leases, this survey fi rst considers the financial status, payment history, collateral value, industry conditions and guarantor support related to specifi c customers. Any delinquencies or bankruptcies are indications of potential impairment requiring further assessment of collectibility. We rou- tinely receive financial, as well as rating agency reports, on our customers, and we elevate for further attention those customers whose operations we judge to be marginal or deteriorating. We also elevate customers for further attention when we observe a decline in collateral values for asset-based loans. While collateral values are not always available, when we observe such a decline, we evaluate relevant markets to assess recovery alternatives — for example, for real estate loans, relevant markets are local for aircraft loans, relevant markets are global. We provide allowances based on our evaluation of all available information, including expected future cash flows, fair value of collateral, net of disposal costs, and the secondary market value of the fi nancing receivables. After providing for specific incurred losses, we then determine an allowance for losses that have been incurred in the balance of the portfolio but cannot yet be identified to a specific loan or lease. This estimate is based on historical and projected default rates and loss severity, and it is prepared by each respective line of business. Experience is not available with new products therefore, while we are developing that experience, we set loss allowances based on our experience with the most closely analogous products in our portfolio. When we repossess collateral in satisfaction of a loan, we write down the receivable against the allowance for losses. Repossessed collateral is included in the caption “All other assets” in the Statement of Financial Position and carried at the lower of cost or estimated fair value less costs to sell. The remainder of our commercial loans and leases are portfolios of smaller balance homogenous commercial and equipment positions that we evaluate collectively by portfolio for impairment based upon various statistical analyses considering historical losses and aging. Sales of stock by affiliates We record gains or losses on sales by an affiliate of its own shares as revenue unless realization of gains is not reasonably assured, in which case we record the results in shareowners’ equity. Cash and equivalents Debt securities with original maturities of three months or less are included in cash equivalents unless designated as available- for-sale and classified as investment securities. Investment securities We report investments in debt and marketable equity securities, and equity securities in our insurance portfolio, at fair value based on quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. Unrealized gains and losses on available-for-sale investment securities are included in shareowners’ equity, net of applicable taxes and other adjustments. We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of that market decline, our intent and ability to hold to maturity or until forecasted recovery, and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses are accounted for on the specifi c identifi cation method. Inventories All inventories are stated at the lower of cost or realizable values. Cost for a significant portion of GE’s U.S. inventories is determined on a last-in, first-out (LIFO) basis. Cost of other GE inventories is determined on a fi rst-in, first-out (FIFO) basis. LIFO was used for 48% and 50% of GE inventories at December 31, 2006 and 2005, respectively. GECS inventories consist of finished products held for sale cost is determined on a FIFO basis. Intangible assets We do not amortize goodwill, but test it annually for impairment using a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete fi nancial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds its fair value. We use discounted cash flows to establish fair values. When available and as appropriate, we use comparative market multiples to corroborate discounted cash fl ow results. When all or a portion of a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value method. 76 ge 2006 annual report

notes to consolidated financial statements We amortize the cost of other intangibles over their estimated useful lives unless such lives are deemed indefi nite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. GECS investment contracts, insurance liabilities and insurance annuity benefits Certain SPEs, which we consolidate, provide guaranteed invest- ment contracts to states, municipalities and municipal authorities. Our insurance activities also include providing insurance and reinsurance for life and health risks and providing certain annuity products. Three product groups are provided: traditional insurance contracts, investment contracts and universal life insurance contracts. Insurance contracts are contracts with signifi cant mortality and/or morbidity risks, while investment contracts are contracts without such risks. Universal life insurance contracts are a particular type of long-duration insurance contract whose terms are not fixed and guaranteed. For short-duration insurance contracts, including accident and health insurance, we report premiums as earned income over the terms of the related agreements, generally on a pro-rata basis. For traditional long-duration insurance contracts including term, whole life and annuities payable for the life of the annuitant, we report premiums as earned income when due. Premiums received on investment contracts (including annui- ties without significant mortality risk) and universal life contracts are not reported as revenues but rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense. Liabilities for traditional long-duration insurance contracts represent the present value of such benefits less the present value of future net premiums based on mortality, morbidity, interest and other assumptions at the time the policies were issued or acquired. Liabilities for investment contracts and universal life policies equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including credited interest and assessments through the financial statement date. Liabilities for unpaid claims and claims adjustment expenses represent our best estimate of the ultimate obligations for reported and incurred-but-not-reported claims and the related estimated claim settlement expenses. Liabilities for unpaid claims and claims adjustment expenses are continually reviewed and adjusted through current operations. Accounting changes We adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 123 (Revised 2004), Share-Based Payment (SFAS 123R) and related FASB Staff Positions (FSPs), effective January 1, 2006. Among other things, SFAS 123R requires expensing the fair value of stock options, a previously optional accounting method that we adopted voluntarily in 2002, and classification of excess tax benefi ts associated with share-based compensation deductions as cash from financing activities rather than cash from operating activities. We chose the modified prospective transition method, which requires that the new guidance be applied to the unvested portion of all outstanding stock option grants as of January 1, 2006, and to new grants after that date. We further applied the alternative transition method provided in FSP FAS 123(R) –3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. The transitional effects of SFAS 123R and related FSPs consisted of a reduction in net earnings of $10 million for the year ended December 31, 2006, to expense the unvested portion of options granted in 2001 and classification of $173 million related to excess tax benefits from share-based compensation deductions as cash from financing activities in our Statement of Cash Flows beginning in 2006, which previously would have been included in cash from operating activities. A comparison of reported net earnings for 2006, 2005 and 2004, and pro-forma net earnings for 2005 and 2004, including effects of expensing stock options, follows. (In millions per-share amounts in dollars) 2006 2005 2004 Net earnings, as reported $20,829 $16,711 $17,160 Earnings per share, as reported Diluted 2.00 1.57 1.64 Basic 1.65 Stock option expense included in net earnings 2.01 1.58 96 106 93 Total stock option expense(a) 96 191 245 PRO-FORMA EFFECTS (b) Net earnings, on pro-forma basis 16,626 17,008 Earnings per share, on pro-forma basis Diluted 1.57 1.63 (b) (b) Basic 1.57 1.64 Other share-based compensation expense recognized in net earnings amounted to $130 million, $87 million and $95 million in 2006, 2005 and 2004, respectively. The total income tax benefit recognized in earnings for all share-based compensation arrangements amounted to $117 million, $115 million and $101 million in 2006, 2005 and 2004, respectively. (a) As if we had applied SFAS 123R to expense stock options in all periods. Included amounts we actually recognized in earnings. (b) Not applicable. As of January 1, 2006, total stock option expense is included in net earnings. SFAS 158, Employers’ Accounting for Defi ned Benefi t Pension and Other Postretirement Plans, became effective for us as of December 31, 2006, and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension and other postretirement benefit plans such as retiree health and life, with current-year changes in the funded status recognized in shareowners’ equity. SFAS 158 did not change the existing criteria for measurement of periodic benefi t costs, plan assets or benefi t obligations. ge 2006 annual report 77