General Electric: Investment Accounting and Consolidations

Article excerpt

ABSTRACT

General Electric Company (GE) is a large, diversified corporation with hundreds of subsidiaries. As of December 31, 2000, GE had total consolidated assets of over $437 billion and a market capitalization of approximately $475 billion. This instructional case considers the use of GE's publicly reported financial statement data to illustrate the concepts and procedures related to (1) investment accounting under the equity method and (2) preparation of consolidated financial statements. In addition, the case highlights the effect of required consolidation on ratio analysis as well as the potential influence of accounting disclosure on investors' perceptions of firm value. Thus, this case should help you better understand the economic significance of relatively technical accounting procedures by analyzing their effects in a relevant, real-world setting.

OVERVIEW

The following excerpt is from Item 1 of General Electric's (GE) December 31, 2000 form 10-K filed with the Securities and Exchange Commission on March 23, 2001:

GE is one of the largest and most diversified industrial corporations in the world. GE has engaged in developing, manufacturing, and marketing a wide variety of products for the generation, transmission, distribution, control, and utilization of electricity since its incorporation in 1892. Over the years, GE has developed or acquired new technologies and services that have broadened considerably the scope of its activities.

GE's products include major appliances; lighting products; industrial automation products; medical diagnostic imaging equipment; motors; electrical distribution and control equipment; locomotives; power generation and delivery products; nuclear power support services and fuel assemblies; commercial and military aircraft jet engines; and engineered materials, such as plastics, silicones, and super-abrasive industrial diamonds.

GE's services include product services; electrical product supply houses; electrical apparatus installation, engineering, repair and rebuilding services; and computer-related information services. Through its affiliate, the National Broadcasting Company, Inc., GE delivers network television services, operates television stations, and provides cable, Internet and multimedia programming and distribution services. Through another affiliate, General Electric Capital Services, Inc., GE offers a broad array of financial and other services including consumer financing, commercial and industrial financing, real estate financing, asset management and leasing, mortgage services, consumer savings and insurance services, specialty insurance and reinsurance, and satellite communications.

Exhibit 1 includes GE's primary financial statements for the years ended December 31, 2000, December 31, 1999, and December 31, 1998. An interesting feature of GE's annual report is that the company separately presents primary financial statements for the consolidated entity (the columns labeled "General Electric Company and consolidated affiliates") along with separate, primary financial statements for its nonfinancial operations (the columns labeled "GE") and its financial operations (the columns labeled "GECS"). Further, as you will discover while completing this case, GE's nonfinancial operating company is presented as the "investor" or "parent" company and the financial operating company is presented as the "investee" or "subsidiary." [1]

GE's presentation of three separate primary financial statements is rare for U.S. companies. All other U.S.-based Fortune 500 companies present only the consolidated financial statements, as required by SFAS No. 94. Therefore, the additional detail presented by GE provides a unique opportunity to investigate issues related to investment accounting and the preparation of consolidated financial statements.

Part 1: Intercompany Investment Accounting

As GE's financial statements suggest, GE-Parent owns a sufficiently high percentage (i. …

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