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Nice writeoff if you can get it...

Discussion in 'Sports and News' started by slappy4428, Nov 7, 2007.

  1. slappy4428

    slappy4428 Active Member

    Can I do this too?

    $39-billion charge won’t cut into GM’s cash

    November 6, 2007


    General Motors Corp. will report the biggest loss in its history today — on paper — when it takes a $39-billion noncash bookkeeping charge, the automaker said Tuesday in a news release after markets closed.

    It almost certainly will be the biggest one-quarter net loss in the history of the auto industry, though it will not result in the company’s having any less money on hand.

    The charge involves a complex accounting procedure that writes off deferred tax assets — credits the company accrued as it lost money. Those credits were counted in the book value of the company.

    Essentially when a company loses money, it can carry the tax assets forward on its books to offset taxes on future income. But when it appears those assets will not be used in the near term, they are then to be written off, sometimes resulting in a large charge.

    In 2003, auto parts maker Visteon Corp. lost $9.65 per share, fueled by a similar charge. But GM’s loss this will dwarf that figure, averaging $68.90 per share.

    The move was a surprising setback for GM, which has posted three months of growing U.S. sales and edged back ahead of rival Toyota Motor Corp. in global sales for the year. GM also reached agreement what was considered a very favorable contract with the UAW this fall.

    But problems in the mortgage market have reversed the fortunes of finance company GMAC, in which GM is a 49% stakeholder, from a steady source of cash into a question mark. GM also cited challenging conditions in the United States and Germany.

    Because the charge does not affect GM’s cash on hand, it should not harm the
    company’s ability to pay workers, suppliers or lenders. But the full implications are

    “It’s a noncash charge and nonrecurring, so I think the market will shiver a bit about this and then get over it,” Burnham Securities analyst David Healy told Bloomberg News.

    But he told the Free Press he was surprised at the changing outlook for GMAC and the potential for ongoing problems at its Residential Capital LLC, or ResCap, unit, which holds subprime mortgage loans.

    “I knew the auto industry outlook was deteriorating … this is an indication of that. But also the outlook at ResCap is worse than expected,” Healy said. “That’s the surprising part to me."

    Fritz Henderson, GM’s vice chairman and chief financial officer, said the charge does not imperil the automaker’s long-term financial outlook.

    “GM continues to believe that its new product introductions, combined with the new
    GM-UAW labor agreement, once fully implemented, will significantly improve GM’s competitive position in the U.S. and better position the company to utilize tax benefits in the U.S. and Canada in the future,” he said in a statement.

    Spokeswoman Renee Rashid-Merem added: “It’s not that we don’t anticipate profitability. It’s that we can’t say when or how much.”

    The charge is specifically to establish a special account called a valuation allowanceagainst what are called deferred tax assets in the United States, Canada and Germany.

    The accounting for such matters relates to a rule that requires companies to assess whether such valuation allowances should be established based on all
    available evidence using a “more likely than not” standard, GM said in its statement.

    In making such judgments, significant weight is given to historical results, which are “difficult to overcome,” the company said.as a “significant negative factor.”

    Added Henderson: “It’s also important to note that the establishment of a valuation allowance does not reflect a change in the company’s view of its long-term automotive financial outlook.”

    The news was announced after U.S. markets had closed for the day. Earlier Tuesday, GM shares had risen 16 cents, or 0.4%, to close at $36.16.

    GM stock fell in after-hours trading, with shares selling at $35 at 6:42 p.m.

    That is in the middle of the range in which the shares have traded over the last year: from a low of $28.49 to a high of $43.20.

    GM is scheduled to release its third-quarter financial results and host an analysts and media conference call today.

    Deferred tax assets spring from timing differences, or “temporary differences,” multiplied by times the tax rate, according to a September 2000 article in the Tax Executive. “Temporary differences arise where the tax treatment of an item is temporarily different from its financial accounting treatment,” the article said.

    For example, generally accepted accounting principles may allow a $20,000 expense for an account while the Internal Revenue Code may allow only an $8,000 tax deduction. In this case, there would be a temporary difference if the Internal
    Revenue Code allows for the remaining $12,000 to be deducted in subsequent years, according to the article.

    Despite GM’s third straight month of improved year-over-year auto sales, analysts had expected GM’s profit to fall based primarily on its stake in GMAC.

    GMAC posted a $1.6-billion loss for the three months ending Sept. 30, fueled by defaults in its ResCap division
  2. poindexter

    poindexter Well-Known Member

    It's not a nice write-off at all. They are writing down something (a deferred tax asset) which would have saved them a bundle if GM was anticipating profits in the foreseeable future.

    You don't even know what a write-off is. [/seinfeld]
  3. Simon_Cowbell

    Simon_Cowbell Active Member

    That may as well have been the Rosetta Stone I was trying to read.
  4. Jersey_Guy

    Jersey_Guy Active Member

    This USA Today story is much easier to understand:


  5. Ace

    Ace Well-Known Member

    $39 billion? Pretty soon that's gonna start adding up to real money.

    I sure hope this doesn't affect the bonus plan for the top executives.
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