How GM Avoided A $30 Billion Loss: With A Little Juggling

Bertel Schmitt
by Bertel Schmitt

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:


“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.”


“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.”

“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.”

Join the conversation
2 of 53 comments
  • Doctor olds Doctor olds on Feb 18, 2013

    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.

  • Doctor olds Doctor olds on Feb 18, 2013

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

  • Tassos Chinese owned Vollvo-Geely must have the best PR department of all automakers. A TINY maker with only 0.5-0.8% market share in the US, it is in the news every day.I have lost count how many different models Volvo has, and it is shocking how FEW of each miserable one it sells in the US market.Approximately, it sells as many units (TOTAL) as is the total number of loser models it offers.
  • ToolGuy Seems pretty reasonable to me. (Sorry)
  • Luke42 When I moved from Virginia to Illinois, the lack of vehicle safety inspections was a big deal to me. I thought it would be a big change.However, nobody drives around in an unsafe car when they have the money to get their car fixed and driving safely.Also, Virginia's inspection regimine only meant that a car was safe to drive one day a year.Having lived with and without automotive safety inspections, my confusion is that they don't really matter that much.What does matter is preventing poverty in your state, and Illinois' generally pro-union political climate does more for automotive safety (by ensuring fair wages for tradespeople) than ticketing poor people for not having enough money to maintain their cars.
  • ToolGuy When you are pulled over for speeding, whether you are given a ticket or not should depend on how attractive you are.Source: My sister 😉
  • Kcflyer What Toyota needs is a true full size body on frame suv to compete with the Expedition and Suburban and their badge engineered brethren. The new sequoia and LX are too compromised in capacity by their off road capabilities that most buyers will never use.