GM's announcement of a $38.6 billion loss yesterday generated quite a bit of shock and many questions. The explanation of "accounting adjustments" didn't sit well with those of us who don't study tax laws for a living, so we decided to pull out our Rolodex and call up someone who could give us a quick lesson in accounting standards. Fortunately, we had the number for Manuel Johnson, former chairman of the Financial Accounting Standards Board (FASB).
Mr. Johnson explained to us that U.S. tax law allows a corporation that suffers net losses to carry forward the total loss balance into future years in order to use the negative numbers as offsets against future profits. The result is that future taxes are lower because the corporation is taxed only on the profits minus the forwarded loss. Meanwhile, the total losses that are carried forward are treated as assets on the balance sheet. That is where GM gets its total of $38.6 billion; it is the automaker's cumulative loss total.
In particular, Mr. Johnson had this to say for the reasoning behind GM's surprising book report:
The FASB has decided to toughen the criteria for asset valuations on the balance sheet of corporations. Adjustments are required for assets that don't meet the tougher test by first quarter of 2008. This is a one time adjustment and it could be reduced in the future if it looks like GM will be more profitable.
It looks like GM chose the 3rd quarter of 2007 to make the necessary adjustments in its books to match the new rules put forth by the FASB. That is why the $38.6 billion reported number is just a formality and not actual cash. Perhaps we might see a few more corporations follow in the footsteps of GM by posting record losses in coming months, as well.
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Reader Comments (Page 1 of 1)
DJ @ Nov 8th 2007 12:19PM
Also to keep in mind is that this is not a "loss" per se but a cumulative adjustment to previously recognized gains.
sledge @ Nov 8th 2007 12:53PM
Good point DJ. I think most articles and certainly GM's press release did specify that this was a non-cash adjustment. So really speaking no actual money came in/went out the door.
I think my analogy for this would be this: You got a $10 discount coupon on your receipt while checking out at Wal-Mart. You were telling people that you were now $10 richer. Then comes the IRS and says, well technically you can't really count that when you are calculating your net worth unlike other items like your car and your house. So then you had to go and tell the world, "That you aren't including that $10 in your net worth calculation".
That is probably a horrible analogy, so feel free to rip it to bits and come up with your own! :-)
Steve_S @ Nov 8th 2007 12:42PM
You know, handling money shouldn't be so confusing. Even in more laymans terms it's still not exactly clear how you can move around losses and such like that.
nikola @ Nov 8th 2007 6:23PM
^^^whats not clear about it?? They are major corporation who work with other major corporations to hold an illegal and unconstitutional level of control over politicians and public policy. The tax laws of the US don't apply to them, or rather, they can simply makeup laws so that they no longer apply to them. We as Americans must pay our taxes, they however do not. Generally Malevolent strikes yet again.
Whitie @ Nov 8th 2007 12:43PM
GM should have done this "adjustment" in the 2nd quarter.. maybe they would have struck a better deal with the UAW.
DJ @ Nov 8th 2007 1:46PM
Really, the point here is the adjustment recorded this quarter and in the past doesn't matter, the possible future benefit that may be derived from the tax losses didn't just disappear (unless tax code changes), they just aren't recognized until realized. They will still be disclosed on their financials (as they were in the past), but just not on their Balance Sheet (short form 'BS' perhaps says it all).
All financial reporting includes a mix of cash and non-cash items and you can not attach yourself to the bottom line without looking at the financial reporting as a whole.
Eric Biran @ Nov 8th 2007 2:39PM
So if I understand this correctly, GM lost money in past. At that time, they weren't making a profit, so there wasn't much they could write off tax-wise due to the losses. Instead, GM is reporting the losses now (as a non-cash item) to get the tax breaks on their current profits.
This does make sense in general, in that it would allow a company which was suffering financially to get back on its feet as it first returns to profitability. Someone please correct me if I'm misunderstanding things.
Eric Biran @ Nov 8th 2007 2:40PM
So if I understand this correctly, GM lost money in past. At that time, they weren't making a profit, so there wasn't much they could write off tax-wise due to the losses. Instead, GM is reporting the losses now (as a non-cash item) to get the tax breaks on their current profits.
This does make sense in general, in that it would allow a company which was suffering financially to get back on its feet as it first returns to profitability. Someone please correct me if I'm misunderstanding things.
jcuoit @ Nov 8th 2007 2:45PM
so they post a huge loss so they can carry it forward as an asset towards keeping taxes down over the coming quarters?
or was the original plan to report a less drastic loss and then carry it over coming quarters to keep profits-taxes down, but due to the Financial Accounting Standards Board's new rules they have to report it all right now?
can they now carry forward this loss onto later quarters to keep their taxes low?
JC
Merritt @ Nov 8th 2007 3:04PM
The losses are carried forward to count against profits, when they are once again realized. However GM has not yet shown a net profit to offset their loss totals. In the past these numbers have not shown on the balance sheet. However recent changes in accounting standards have stipulated that the numbers need to be reported if they cannot be used as an asset within a particular time span.
blogged to death @ Nov 8th 2007 3:00PM
The adjustment done this quarter is just evidence that the past quarters or miniscule profits they reported were not in fact real b/c they kept carrying forward losses. That means that the previous quarters were much worse than Wall Street suspected and we've been lead along thinking the turn around was working.
Golferal @ Nov 8th 2007 3:12PM
I'm thankful for the clarification. There were quite a few armchair accountants and financial analysts having a field day in the original article's comments section.
More proof that you have to take most "information" with a grain of salt.
DJ @ Nov 8th 2007 3:22PM
No … I’ll try to make this concise. Financial income/loss is usually never the same as income/loss for tax purposes. In the past, the GM incurred certain losses for tax purposes that under tax code they are able to carryforward to offset against taxable income (when they actually have it), thereby reducing the taxes they would pay in the future. For accounting purposes, previous theory said you could recognize the estimated benefit of the future tax savings before you actually do for tax purposes under certain conditions. The accounting rules have changed and so you’re now seeing a correction for what was allowed for in the past. The availability of these tax losses to offset against future income (assuming they still exist) will still be disclosed in the notes/commentary of the various financial reports, that hasn’t changed.
Fady @ Nov 8th 2007 3:29PM
Oh well, no more deferred tax asset...man, I'm reading work related stuff even on my lunch break...back to auditing I guess...can't get away from it.
Mike Botros @ Nov 8th 2007 5:25PM
sux to be u... let's trade cars...
Yar @ Nov 8th 2007 4:34PM
Exactly. You have to take more than one accounting/economics class to really understand whats going on here, but rest assured it doesn't mean that GM just 'lost' $39 billion.
Mallory @ Nov 8th 2007 4:58PM
While this isn't a loss of real money, it still appears to be a real loss of assets from the books. In other words, if you're removing these carry forwards and generating a loss, did initially adding them create a gain? If so then you artificially inflated gain at some point in the past by recording assets that did not exist, thus resulting in a true loss of value when they are removed. So while GM didn't really 'lose' $39 billion, they still have $39 billion less in assets than they did a week ago.
MS82 @ Nov 8th 2007 7:24PM
Most of you are seriously misleading people in regards to your "knowledge" of this "charge".
1) NOT New Accounting - This is not new accounting. The charge was taken under FAS 109 - Accounting for Income Taxes. This is not a new FASB statement. "The charge" is due to a change in estimate on future taxable income in 3 foreign jurisdictions (eg. previously, the Company thought they would be profitable in these jurisidictions for tax purposes; now they are forecasting continued losses through the expiration of the NOL carryforwards).
2) What's the accounting model? In prior years, the Company was in a NOL (net operating loss for its taxable income calculation) position. For financial reporting (book) purposes, the Company assessed the future realizability of these NOLs (tax laws allow you to carryforward NOLs into the future to reduce future taxable income). For the NOL to be realizable, you must estimate you will have future taxable income before the carryforward expires. PREVIOUSLY, the Company forecasted taxable income in these jurisdictions. At such time, they recorded Dr. Deferred Tax Asset (balance sheet), Cr. Income Tax Expense (IS reduction of expense). In Q3, the Company is no longer forecasting sufficient taxable income to realize these NOLs. As these assets will now never result in cash to the Company, they essentially wrote off the assets (Dr. Income Tax Expense, Cr. DTA Valuation Allowance).
3) So what's the real impact on the Company from a financial prospective -- Answer - it depends on what the market's expectation was. Yes, its a "non-cash" charge today but previously, they expected a cash benefit (through the reduction of taxes payable to the jurisdictions) in the future. Now, they don't expect to get this cash benefit due to unforeseen declines in taxable income in these jurisdictions. It doesn't directly cost them cash as they expect continued losses in these jurisdictions, however, they previously expected taxable income (which usually equates to cash inflows) which they are not longer expected.
Roy Mustang @ Nov 8th 2007 9:36PM
So how does a stock worth $33 lose $69 per share?
Look at the balance sheet...
http://media.corporate-ir.net/media_files/IROL/84/84530/earnings/Q307_Financial_Highlights.pdf
Assets: $149 billion
Liabilites: $190 billion
That's right, if you sold everything GM owned, you would still $50 billion dollars more to pay down what they owe.