GM's $39b Hit to Offset Value of Deferred Tax Assets, Explained

Robert Farago
by Robert Farago
gm s 39b hit to offset value of deferred tax assets explained

To try to get my head 'round the fact and ramifications of this accounting-related announcement, I sent an email to TTAC's Deep Throat. "Effectively, a company keeps two sets of books: one for financial disclosure and one for the taxman. The tax credits created by depreciating assets accumulate faster/look smaller on the tax books than on the financial books. The difference between the two creates a tax credit (a.k.a. an asset). Assuming static business, over time, as the financial books catch up with the tax books, the credits get "used up." If a company grows, those deferred tax credits also grow. But the tax credits cannot exist forever; they must get paid. With this move, GM is essentially saying its accountants can no longer justify carrying these tax credits as an asset; they reckon their employer's future growth is limited. All that said, the $39b announcement may not necessarily result in a cash payout because of the way the tax code works. It's very arcane stuff that few people really understand. My guess is that this will have some cash consequences, but we'll have to wait and see if, when and how much. Meanwhile, it's safe to say this announcement will raise concerns about GM's prospects in the credit markets given the further fragility of GM's balance sheet." [NB: Accounting and high finance experts are invited to add their perspective, as long as they do so in something resembling plain English.]

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  • Bleach Bleach on Nov 07, 2007

    Looking at their release, a couple of other things popped out at me that are worse than I've thought. 1) In the 3rd quarter, 38.1% of car sales were fleet compared to 33.9% last year. For trucks it went from 17.3% to 21.6%. YTD, there's almost no change. So they may be sending fewer vehicles to fleets on an absolute basis but they are depending on fleet sales no less than before. 2) They shaved 14K hourly employees to a total of 78K but only shaved 1K salaried employees to a total of 32K?

  • Geotpf Geotpf on Nov 07, 2007

    bleah-The salaried vs. hourly employees makes sense. The hourly employees are the ones that actually make the vehicles. If each model sells 20% less than the previous one, you need 20% less hourly employees (give or take). BUT, you don't eliminate any salaried employees. You still need the same number of engineers, the same number of accountants, the same number of secertaries, the same number of dealer reps, the same number of ad people, the same number of lawyers, the same number of... Now, you could eliminate some engineers and ad people, etc., if you offered fewer models. But that doesn't seem to be the case. The only GM brand that is shrinking signficantly, in the number of models offered, is Buick. And the number of models Saturn is offering growing by about the same amount. The only change is that each individual model is selling fewer. This is not a good thing. IMHO, a small company that used to be big is usually in a lot worse shape than a small company that's always been small. The formerly big company's fixed expenses (not just salaries) are higher, because they are designed around when the company was bigger and probably haven't shrunk to match.

  • EJ_San_Fran EJ_San_Fran on Nov 07, 2007
    EJ: Stated differently, GM has massively overstated profits in past years (by recording tax credits that are not really usable). Pch101 : I don’t follow that point. Let's look at an example. Suppose GM had a loss of $3B in a prior year. With a 35% tax rate they would only report a $2B loss, while the remaining $1B of loss is turned into a deferred tax credit. So, we all thought: Oh great, only $2B loss instead of $3B. Now that $1B is popping up, along with 38 others. Ah well, pocket change for GM, right?
  • Pch101 Pch101 on Nov 08, 2007
    Sure. Yesterday GM had a total corporate value of $20 billion dollars. And today they officially eliminated another $39 billion of value from their corporation. Sorry, but this isn't accurate. You are confusing book value with market capitalization. Market cap is just the value of the stock, i.e. how much money would be needed to buy every single share of stock issued by the corporation. GM's stock fell a bit more than 6% today, so its market cap as of this moment is over $19 billion. This is quite literally the market value of the company. Book value is the difference between assets and liabilities on the balance sheet. As of June 30, 2007, that amount was a negative number of -$3.55 billion. (Apologies, I misstated the amount in my first post and have since corrected it.) I haven't yet seen the latest balance sheet of September 30, but it's probably something similar to the -$3.55 billion added to the inverse of the $39 billion amount mentioned in Mr. Farago's blog entry. So we'll see it soon enough, but the book value is probably something worse than negative $40 billion. So the book value was negative before and after this charge off, it just got a lot worse. But the market cap did not fall by a corresponding amount. It's an accounting value that does not directly correspond to the market value of the company (although I don't wish to trivialize the potential gravity of the writedown discussed in the blog. That's doesn't mean GM is out of the woods. Stocks are typically valued based upon a multiple of their expected earnings; these days, GM stock is a speculative play based largely upon what its potential value could be if the turnaround plan succeeds. If the market gets the signal that the plan is a flop, you would expect the stock to take a dive as the market finally wakes up. I'm guessing that it will begin slowly, but then snowball as investors put two and two together.