By on February 15, 2013

So you think GM had a big profit last year? There are other people who say that GM should have reported a $30 billion loss. At least as long as GAAP (Generally Accepted Accounting Principles) are applied. How did that happen? It’s a puzzle palace of assets out of thin air, of non-paid taxes on assumed future earnings. It started in 2010 …

Back in 2010, Bloomberg and Ed Niedermeyer took GM to task over a bookkeeping entry called “goodwill.” It’s what’s also called an “intangible” asset, an asset that usually is hard and often impossible to get one’s hands on. If you buy a company, goodwill is easy: It’s the difference between the fair value of the net assets and the purchasing price. Apart from that, goodwill pretty much is what you want it to be – within not always clear limitations. So there you thought a lot of people did not think too highly of GM after the bailout, but in 2010, goodwill was GM’s largest non-current asset, to the tune of $30.2 billion. Without that extremely intangible asset, GM would have had a negative equity of $6.3 billion. If you want to know more about this, refer to Ed’s article from 2010.

This article also explained that as GM’s creditworthiness improves, the goodwill balance would decline. Perversely, improved results “could make GM’s goodwill vulnerable to write-downs in future periods, which would reduce earnings,” as the article said. Think of it as channel stuffing on a much, much grander scale.

This write-down happened in 2012. GM took a goodwill impairment charge of about $27 billion. Then how did GM end up with a $7.9 billion operating profit and a $4.9 billion net profit for 2012? With another intangible entry. GM adjusted its earnings with a tax benefit of $35 billion for a “deferred tax valuation release.”

What’s that, you ask? Mark Modica of the National Legal and Policy Center explains it:

“My understanding of the tax benefit, in simple terms, is that GM is taking as income the $35 billion in tax savings it says it will have in the future as a result of the sweetheart deal it got when the Obama Administration allowed it to have billions of dollars in tax-loss carryover credits, thus giving the company years of tax-free income.”

In other words, GM made a profit this year by booking the taxes saved on profits it will make in the future. Welcome to the New Old GM. Without this juggling act, GM would be deep in the reds, Modica says:

“GM uses non-GAAP (Generally Accepted Accounting Principles) to calculate its calendar year operating income of $7.9 billion. The GAAP number does not allow the tax benefit and is a bit more troubling at a LOSS of $30.4 billion.”

Undoubtedly, the pro-bailout, pro-UAW, and pro-Obama crowd is already typing comments along the lines that the National Legal and Policy Center is an organization that makes the Tea Party look like a group of bleeding-heart liberals. Wait, there are others that don’t think too highly of the accounting abracadabra:

Investopedia:

“The amount of deferred income tax is based on tax rates in effect when temporary differences originate. It is an income-statement-oriented approach. It emphasizes proper matching of expenses with revenues in the period when a temporary difference originates. Finally, it is not acceptable under GAAP. …Management can use changes in the allowance to “manipulate” NI (net income) by affecting income tax expense. Analysts should scrutinize these types of changes.”

Wikinvest:

“A valuation allowance depends a great deal on management assumptions – who’s to say how high a company’s future profits will be, and therefore whether the company will be able to take advantage of its deferred tax assets? If management changes its assumptions about future earnings, the valuation allowance changes, and the difference is reported as earnings, today. So, management at companies with valuation allowances can directly change reported earnings today by changing assumptions about earnings tomorrow. Changing a valuation allowance is one way that management can manage or manipulate its earnings.”

Fool.com:

“Keep a watchful eye on valuation allowances. Because they’re based on very subjective estimates, they’re an easy way for management to manipulate earnings. For example, if a company has a $100 million valuation allowance to offset $100 million in DTAs, and management realizes it’s going to miss earnings by $2 million, it can make slightly more aggressive assumptions to release $2 million in its valuation allowance, which flows to net income and allows the company to meet earnings.”

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54 Comments on “How GM Avoided A $30 Billion Loss: With A Little Juggling...”


  • avatar
    highdesertcat

    Creative accounting, and money is fungible.

    Maybe in this case it is more appropriate to say that bailout money is fungible especially when coupled with creative accounting.

    • 0 avatar
      rnc

      What is really missing and I don’t have time to read all the comments is that GM’s deathwatch should still be ongoing, yes the defibribulator worked, but the goodwill amounted to the difference b/t what would have been considered GM’s fair market value and what the government pumped in, let alone that a one time exception was made to allow for deferred tax assets to be carried forward in bankruptcy (all deferred tax assets are is basically calculating taxes on negative income and calling it a credit to be applied against future earnings (with a time limit), thus the goodwill was created b4 the ability to use the tax asset was lost (even though it shouldn’t have been there in the first place). Add to the fact that $30+ billion in debt went bye-bye and post BK GM is still banking on the same plan as pre-bk GM was…that the million + or so retirees they are supporting from the days of having 60% of the market start dying in mass before once again the inability of a company with 18% to sustain it catches up again (and people sure do keep living longer), roughly they have 6-7 years for those million to start dying off exponentially yoy or its over (especially considering the cancer called opel) (dying companies can have beautiful income statements). good article.

  • avatar
    thelaine

    Well done CFO. Executive bonus time.

  • avatar
    icemilkcoffee

    Bottom line is Ackerson needs to be gone. The board seems to have fallen asleep.

  • avatar
    Fred Smith

    While GM isn’t the only public company to obfuscate their earnings, this does highest how easy it is to make money on paper! Nice work TTAC

  • avatar
    wsn

    Please make more money like this and pay back tax payers in full amount what they spent on GM.

  • avatar
    Pch101

    The goodwill impairment charge is an expense that reduces income. GM’s 2012 income on a GAAP basis is lower than it would have been if it hadn’t taken the writedown.

    • 0 avatar
      highdesertcat

      You have a knack for overstating the obvious.

      I believe most readers who choose to comment, know this. No one blames GM for doing this because the idea is to present GM to the world in the most favorable light.

      The point being that if GM’s true financial position be known, it would take the wind out of the sails of even the most ardent fan-club members.

      • 0 avatar
        mikey

        @highdesertcat….”GM’s true financial position be known” Do you know it? Does anybody?

        I’m not trying to be a smartass here. As somebody with dog in this fight,I would like to know.

      • 0 avatar
        highdesertcat

        mikey, I don’t know the answer to that but I am literate and I can read and comprehend articles written by respected authors at highly regarded journals. And when articles like the aforementioned come to light it is generally but the tip of the iceberg.

        Reflect back to 2007 through mid 2008 and the comments of the more astute industry-watchers. The more they started digging, the more became exposed and by the time GM and Chrysler came before Congress looking for a handout and a bailout, all of those nay-sayers had suddenly been elevated to the status of gurus, making guest appearances on TV and writing op-ed articles in Wall Street publications.

        I believe that this is deja-vu all over again! It’s not the end of the world, though. GM’s trucks could suddenly outsell the F150 and their Malibu could outsell the Camry, with the Volt celebrating its 1-millionth car on the road in 2013. That would reverse GM’s financial position.

        Were that to happen though, the UAW would strike for higher wages and greater benefits to force profit sharing. GM is in a no-win situation and for we, the people, this whole enigma is a lose-lose debacle.

      • 0 avatar
        sunridge place

        HDC

        Mark Modica? Highly respected?? Really???

        Here is Ed’s take on him from a couple years ago.

        http://www.thetruthaboutcars.com/2011/06/volt-scam-debate-misses-the-point/

        He seems like a really balanced blog writer.

        http://nlpc.org/blogs/mark-modica

        HDC..you do not have a clue what he is even talking about…quit pretending you do.

      • 0 avatar
        highdesertcat

        I don’t know who Mark Modica is. I don’t believe I ever read anything by him. Which financial publication does he write for?

        I googled Mark Modica and didn’t find anything familiar to me.

        Where did I mention I followed Mark Modica?

        Are you assuming things or just adding to things never said in your own mind? Please re-read what I wrote.

      • 0 avatar
        sunridge place

        You said:

        ‘I don’t know the answer to that but I am literate and I can read and comprehend articles written by respected authors at highly regarded journals. And when articles like the aforementioned come to light it is generally but the tip of the iceberg’

        This article from Bertel is 90% Mark Modica’s blog ranting.

      • 0 avatar
        highdesertcat

        So, what? Mark Modica isn’t the only one who writes articles.

        And before you accuse Bertel of plagiarism, I recommend you google Bertel Schmitt and read up on his Linked-In page.

        Bertel can hold his own. I’d take Bertel’s articles over anything you’ve written. I’m certain that even Mark Modica writes for the record and does his due diligence research before he commits. The same cannot be said for your wild-ass commentary and criticisms.

        Since you mentioned Mark Modica I have read a few articles by him. I don’t agree with everything he wrote, preferring to give GM the benefit of the doubt, until proven otherwise, like in 2009.

      • 0 avatar
        sunridge place

        ‘And before you accuse Bertel of plagiarism’

        I did no such thing. This article starts with him saying:

        ‘There are other people who say that GM should have reported a $30 billion loss’

        The ‘other’ people he is talking about is Mark Modica’s blog posts over the last two days.

        Bertel links to it and everything you read in italics is a direct quote from Mark Modica’s blog posting…not Bertel. I wasn’t saying he was stealing a damn thing.

        This isn’t ‘wild ass commentary’ its simply pointing out the source of the claim is a bit suspect…and he seems to be the only person making these claims.

      • 0 avatar
        highdesertcat

        One of the things I do not agree with is anyone saying that GM should have declared the $30B loss. That’s just not done when, as a going concern you have to present yourself to the public as a viable, self-sustaining, profitable company and, certainly, in the most favorable financial light to the global community.

        Until the declaration of bankruptcy in 2009, GM also continued to represent itself in the most favorable light to the public and its stockholders. Well, at least until the doo-doo hit the fan and the financial grave beckoned with its fickle finger of corporate fate. GM, at that time, had completed its life cycle.

        My own belief is that GM is doing the same now, betting that somehow, its new crop of models and vehicles for 2014 and beyond will help it to attain a financial upright position. That remains to be seen yet.

        But, if GM should fail again in the future or otherwise need a financial influx, there’s always the US tax payers. Like I said, we’re in for a penny, in for a pound.

        The US government will continue to bail out GM if that ever comes to pass. I didn’t agree with the bailouts, handouts and nationalization of 2009 but I can also recognize that it is now part of the financial infrastructure of the new America. As someone else already said, “Elections have consequences.”

        It doesn’t take a financial genius to understand that GM is losing more money that it is making, no matter how they account for it. If somehow, you walk away with a different assessment of GM’s financial position than I do, we’d have to agree to disagree.

      • 0 avatar
        sunridge place

        ‘It doesn’t take a financial genius to understand that GM is losing more money that it is making, no matter how they account for it. If somehow, you walk away with a different assessment of GM’s financial position that I do, we’d have to agree to disagree.’

        Forget about me…Warren Buffett seems to disagree with you as well…and we all know that guy has a long history of ‘wild ass’ decisons.

        http://www.freep.com/article/20130214/BUSINESS0101/130214086/Warren-Buffett-picks-up-more-GM-shares?odyssey=nav%7Chead

        HDC…you don’t even have a clue what this impairment is or what it means…you see an ominous headline and jump to conclusions as always.

      • 0 avatar
        highdesertcat

        Please see Mike Kelley’s comment below.

        Mike Kelley
        February 15th, 2013 at 10:08 pm

        I could not have said it better!

        (Sorry about the delayed reply. I took my wife to lunch and then shopping.)

      • 0 avatar
        sunridge place

        Buffett isn’t a fool…he bought up newspapers because he will make money on them.

        Get a clue.

        http://www.businessweek.com/articles/2012-05-17/why-warren-buffett-really-likes-newspapers

        Here’s a nice quote:

        ‘Buffett may have a soft spot for newspapers. But when it comes to investing, he’s no sentimentalist’

    • 0 avatar
      DubTee1480

      I must have missed something, what’s up with the dunce cap?

    • 0 avatar

      I got your GAAP right here!!! GM has MORE tangible “BADWILL” than any other automaker out there. Balance THAT! Could a meteor hit the “Renaissance Center”??? Would anybody notice? What a Fing zombie joke of company. FUGM

  • avatar
    jkross22

    This doesn’t yet stink, but it definitely smells.

  • avatar
    Chocolatedeath

    And in other news GM took government money..

  • avatar
    Zackman

    I want to hear ‘Doctor Olds’ and ‘Buickman’s’ take on this. Might as well hear from ‘NulloModo’, too. Could be very interesting.

  • avatar
    gmichaelj

    A brief look at GM’s income statement shows that the Company took a $27.145 bil loss on goodwill impairment while recording a negative tax expense of -$34.831 billion. The latter could not have happened without the former.
    Earnings before taxes and unusual items was a loss of -$1.3 billion for 2012 vs. profit of $11.038 bil in 2011.

    For comparison, Ford had EBT before unusual items profit of $7.332bil for 12 months ended Sep 2012 vs. $8.681 for 12mo Dec 2011. Ford had a negative tax expense of -$10.35bil (9/2012) and -$11.54bil for 2011

  • avatar
    APaGttH

    Crunch crunch crunch

    Usual suspects aren’t here yet to stir the pot, but I have my popcorn ready…

  • avatar
    gslippy

    Is this “deferred tax valuation release” a one-time event, or is it the gift that keeps on giving?

    If it’s a one-time event, I would imagine 2013’s results could be grim.

  • avatar
    KixStart

    I’m having a hard time getting worked up over GM avoiding a loss based on the writedown of one imaginary number with a change in valuation of another imaginary number.

    And Modica’s credibility is somewhat strained, anyway:
    http://www.factcheck.org/2012/09/gms-government-sales/

  • avatar
    TW4

    This is another counter-intuitive situation that baffles the layperson and creates an incredible opportunity for journalists to bang the gong of conspiracy. I remember being a kid in Accounting 101, and my professor singing the praises of US R&D accounting principles that allowed US firms to expense R&D, rather than capitalize the costs. This allowed US firms to report lower profits.

    Companies actually want to suppress profits to protect their real income streams from taxation. If a dollar goes out the door in the current fiscal year, they want to expense it in the current fiscal year. If they have assets on the books, they want to write down those assets as quickly as possible (in most cases) b/c the book/tax value of the assets has little or nothing to do with the income productivity of the asset. This is often the case in small business, which have a Section 179 allowance that allows them to expense capital assets in the current period. The asset is technically worthless after the first year, but the computer, for example, continues working long after the first year of service.

    Though it is generally against GAAP to book at tax deferred asset as income, doing so actually increases GM’s tax liability over the next several years. If they didn’t book tax deferred assets as income, professional traders would grasp the nature of the loss after a few minutes of analysis. The layinvestor would not, hence the “watch out” warnings on investopedia and such. The general public would sh*t a brick at the idea of a “loss”. After the outrage subsided, the media would shift to the tax benefits of the loss, and how GM shafted the US Treasury.

    Of course, GM’s balance sheet is quite poor so this write down could raise the specter of negative equity, but I tend to think that GM made the right decision in the extreme bailout situation they are in.

  • avatar
    korvetkeith

    GM’s most creative employees are its accountants.

  • avatar

    So GM takes an impairment charge, making profits seem less than they really are and still gets criticized? Would you have liked it if they deferred these charges showing bigger profits? I wonder if GM took on these charges to show a smaller profit and thus pay smaller profit sharing checks.

    I wouldn’t worry too much about GM’s future. My employer, one of the richest people in the world, one who rarely encounters red ink, has gradually raised his stake in GM to become one of GM’s largest individual stock holder with 25 Million shares.

  • avatar
    Ron B.

    General Motors? this is the same General motors that claimed YESTERDAY that they are broke and have to borrow money from the Australian Government to remain in business in Australia?
    Is this another way of making money?
    GM holden ,just like the now defunct Chrysler /Mitsubishi factory in South Australia are just like a mail order Russian bride, continually asking for more money in return for promises of true love sometime in the future…

    Suck baby suck,blow is just a figure of speech…
    http://www.afr.com/p/national/labor_holden_jobs_rescue_HGMh8af08yT5LJ3w4yB5xJ

  • avatar
    thegamper

    I wont claim to understand any of any of the accounting. Sounds like clever “watch me pull a rabbit out of my hat business”, but me thinks GM’s stock would be approaching zero if those who can decode the accounting really believed there was a 30 billion loss. Berkshire Hathaway has been steadily increasing its GM stake, that seems promising to me. Just sayin……..

  • avatar
    peteo

    This type of juggling of the books has been around as long as there have been accountants. GM is just doing what most companies do during the earliest phase of failure. The financial wizards of the company believe they can continue to snow wall street and the public. They honestly believe that this year was marginal but we hid the truth for just this one time and we will make up for it at a later time because next year most certainly will be better, it just has to be,how do they know that? the POTUS, CNN and Paul Krugman told them. Keep watching,not much longer and GM will be behind the 8-ball again,the product line-up is already getting dated and stale and need bigger incentives to sell.

  • avatar
    Domestic Hearse

    Apparently not everyone is upset by GM’s accounting practices. As reported today by Automotive News…

    DETROIT — Warren Buffett’s Berkshire Hathaway Inc. has acquired 10 million more shares of General Motors, lifting its holdings in the company to 25 million shares.

    The latest investment — disclosed in a Securities and Exchange Commission filing on Thursday — comes as the U.S. government unloads a portion of its stake in the company.

    GM shares fell 3.2 percent, or 92 cents, to $27.75 on Thursday in New York Stock Exchange trading following the release of the company’s fourth-quarter and 2012 financial results. The shares rose 1 cent today to $27.76.

    Berkshire’s GM shares are worth about $694 million based on Thursday’s closing price, making it among the automaker’s biggest shareholders.

  • avatar
    raph

    Damn, I’m going to call my bank and tell them to put a gozillion dollars worth of goodwill into my account.

  • avatar

    for many years now I have called for replacing Deloitte as auditor at GM. they are beyond any reasonable degree of trust IMO. the shenanigans in accounting continue unabated and retaining the same firm that oversaw the McNamara scandal right on thru numerous annual reports containing material weaknesses is a sign of an organization reliant upon tricks as well as outright, boldface lies.

    Warren Buffett’s recent acquisition aside, any savvy investor would do well to avoid placing hard earned money in the hands of this misguided and delusional management who continuously over promise and under deliver. I pity anyone who dares have faith in this deceitful and deceptive operation.

    General Motors is full of many great people who do wonderful work. it’s simply a shame that work goes for naught due to incompetence and corruption at the top.

  • avatar
    drivelikejehu

    The main thing to keep in mind is that GAAP (or IFRS) are not primarily concerned with producing the most accurate financial-economic picture. Firms are required to disclose a wide range of information so that users can conduct a proper analysis, making adjustments for accounting items such as goodwill, deferred tax assets, etc.

  • avatar
    ravenchris

    GM will be notched to fall in a way that will pay Buffet handsomely.

  • avatar
    Mike Kelley

    Warren Buffett has been buying up chunks of the newspaper business lately, too, but I don’t see that as a sign of the industry’s revival. It is more likely a thank you for all the biased coverage given by the papers to his good buddy Obama.

  • avatar
    Polar Bear

    I am trying to understand all this accounting speak. Let me boil it down to this: You can’t pay your bills with goodwill. Expected future tax saving is not money in your pocket this year, if ever. What matters is real money, how much you had, how much you spent and how much you made. So how do those numbers look? Is GM still burning through cash?

    • 0 avatar
      gmichaelj

      without diving into the 10K, I can’t tell you for sure, but they likely wont pay much (if any) in taxes. Note tax accounting and GAAP accounting have differnt rules.

      Bottom line: Lower taxes means less cash burn.

    • 0 avatar
      highdesertcat

      PB, it was an accounting gimmick sanctioned by the IRS that allows GM to lower its tax burden by writing off losses, in lieu of paying taxes.

      Lots of very large corporations do it, by special arrangements. I’m sure BP did something similar (like good will, for instance) after the Maconda disaster, among others. We just don’t hear about it most of the time.

      But in GM’s case with its controversial continued existence because of the bailout and nationalization, it is imperative for GM and its government minders that GM is portrayed in the best possible light.

      I do not believe that Ford is allowed to do the same, and that Fiatsler is in an entirely different boat now that Chrysler is a subdivision of an Italian company.

      It would have been a PR disaster if GM had shown a $30Billion loss, and only given fodder to the critics of the bailouts, handouts and nationalization.

      But in reality, there are probably other shenanigans going on behind the scenes that we, the people, will never know about. So reporting a $30B loss would not have gone over well with Joe Sixpack and Sally Homemaker once Fox News, Fox Business, Bloomberg and CNBC would have broadcast it.

  • avatar
    OAlx

    Doubtlessly, GM has problems. One can wind it up, for what it is worth. What would this be good for? Some are whingeing about some workers possibly at some stage making higher wages. So what? The problem of the US is, not so many people can buy new cars these days, because of wages that have not participated in any productivity increases. The additional car purchases of the top end of income earners that have, cannot compensate for the loss of sales on the lower 80%. Same goes also for houses, furniture, refrigerators, you name it.

  • avatar
    doctor olds

    Three days late, but this is pure and utter BS!!
    These are “non-cash” adjustments. GM, in fact, has a fortress balance sheet, is very strong and getting stronger. The $7.9Billion EBIT is real and the net operating result after Euro losses are considered.

    To confront another lie promulgated here and elsewhere: New GM was not “given” the carry forward tax credits for old GM losses, but, in essence, “paid” for them by agreeing to continue to fund the salary and hourly pension plans. The alternative would have cost taxpayers far more by collapsing the PBGC, backstopped by the government.
    In addition, GM still has the credits, and will continue to use them despite taking them off the books with this action.
    The real truth from GM site:
    GM’s fourth quarter 2012 special items impact to net income of $0.1 billion includes a $34.9 billion non-cash benefit from the release of the majority of the company’s valuation allowances on U.S. and Canada deferred tax assets and an associated $(26.2) billion non-cash goodwill impairment charge; a $(5.2) billion non-cash impairment of GM Europe long-lived assets; and a $(2.2) billion charge related to U.S. salaried pension plan actions announced earlier this year, among other smaller items.

    Those of you who imagine some hidden problems here are really quite ignorant of the accounting , and seem to ignore the reality that this is a publicly traded company with great transparency. Don’t believe the right wing chatterers with their political agenda. Especially distrust anything Herr Schmidt has to say about GM in his desire to promote VW.

  • avatar
    doctor olds

    btw- Billionaire Warren Buffet is betting on GM big time. I suppose the naysayers think themselves smarter than him.


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