A special relationship with accounting

[DAVOUT]

http://www.ft.com/cms/s/1/165e14e8-8d3c-11dc-a398-0000779fd2ac.html

There are countries where if losses are made during a given year a tax credit can be recorded because this loss will be deductible of future taxable profits. This reduces the net result of the year which modifies the net worth.
If losses are made during several years in a raw, the tax credit can be recorded every year, to the extent that there is a reasonable certainty that enough profits will be made in a reasonably close future to offset the cumulative losses.
If the reasonable certainty disappears, the tax credit must be written off, with the consequence that the net worth of the company will be reduced in proportion.
This is what happens to GM. I have to questions:
- How is it possible to build a 39 billions tax credit during the last three years during which the losses did not reach this amount?
- How can it be said that nobody should worry about the 39 billions because it is a “paper loss”? The purpose of modern accounting, compared to the primitive cash accounting, is it not to record all entries, even the not cash entries such as depreciation, amortization, depletion, reserves, provisions etc, entries which all have an effect on the net worth?

Could one expert tell me where I am wrong?

[Japher]

How is it possible to build a 39 billions tax credit during the last three years during which the losses did not reach this amount?

How do you mean? All the losses had to reach that amount in order to get the credit. Right?

There's no need to worry because it doesn't hurt the ability of the company to pay it's bills it make money, but it does hurt their profitability. Still, it's not like American companies are really worried about profit right now, they are worried about breaking even.

[DAVOUT]

Originally posted by Japher


How do you mean? All the losses had to reach that amount in order to get the credit. Right?

Are you telling me that during the last three fiscal years GM has recorded 39 billions losses?

[Dauphin]

Ultimately, if GM make profits in the future, that deferred tax asset still exists. If you don't think the company could make money before the write-off, then your valuation of the company would not be changed after the write-off.

[Dauphin]

What is more puzzling to me is the size based on what I can read. The tax asset is the tax saving and not the losses incurred to produce that asset. So you'd need to gross it up by the relevant tax rate and discount factors. The actual losses would be a lot more than $39 billion.

[snoopy369]

Is this GAAP or non-GAAP? A lot of companies have two sets of books, one that is GAAP compliant and another that is not, and will report both (but primarily the non-GAAP number).

This sounds non-GAAP to me, but I'm not an accountant so I'm not sure I know that there are several things you do in accounting, especially non-GAAP, that are like this, where you write something down as an expected gain/loss and then later on have to either confirm it, or remove it and thus adjust the 'real' numbers.

For example, on the other side, if a company shuts an office, it will often take a loss immediately to offset these costs, even though the costs won't actually be incurred for months. Later on they'll correct it for actual, and will adjust the net worth of the company (and their profit/loss sheet, etc.) based on this. It's not a real gain/loss, it's a correction, essentially.

So here, they were saying "We think we're going to get a $39B tax credit in a year or two, based on what we lost this year, so we'll count this as actually received on our accounting sheets; if we don't get it we'll eventually have to correct this." They didn't actually get or lose any money; they just wrote that they'd get it, and then didn't get it.

It is a 'paper loss' because it's not really lost money, but indeed it is a 'worry' because their net worth is now lower by that much. However, it's not as big of a deal than a 'real loss' because it's not actual cash leaving the company; it's more saying that their position is not as good as they thought it would be, but they're not actualy worse off for it.

[DanS]

- How can it be said that nobody should worry about the 39 billions because it is a “paper loss”?

Going forward, it shouldn't worry you. On the other hand, as I understand it, they already booked $39 billion in earnings (it had to land on the balance sheet somehow, after all). This means that GM was less profitable over the years than what was reported.

Edit: And by the way, there's probably lots of other funny stuff included in that $190 billion in assets on GM's books.

[snoopy369]

Probably? I think you can use the word "definitely" here and not lose any accuracy

[DAVOUT]

Originally posted by DanS


Going forward, it shouldn't worry you. .... This means that GM was less profitable over the years than what was reported.

Edit: And by the way, there's probably lots of other funny stuff included in that $190 billion in assets on GM's books.

If I were a stockholder, I would worry. I was informed, for many years, certainly much more than three, that GM was making profit, and suddenly they declare "sorry, it was a mistake, there was no profit at all but dont worry it is only a paper loss", as if writing off assets had never cash consequences.

[DanS]

Indeed, it would appear that the profits for a number of years in the past were phantom. And the losses were much worse than expected in the last 2.5 years. No argument from me there.

Taking a look at the income statement, it appears that the difference between "income before tax" and "income after tax" for the last several years totals nowhere near the $39 billion being written off. I guess they could have listed parts of these tax benefits in another areas of the income statement. Dolphin alludes to this.

http://finance.google.com/finance?fstype=ii&q=NYSE:GM

So to be honest, I'm confused as to how they arrive at the $39 billion figure.

[Dauphin]

Looking at the accounts, seems to me that most of the deferred tax assets are in relation to pensions and other retirement benefits, and have been in the accounts for a while. They are not due to the recent losses that GM have made.

ie the net tax position had increased to ~$40 billion only because the tax liabilities had decreased and the tax assets hadn't move that much.

[DanS]

Sounds a likely story. Where else could you stash $39 billion? Perhaps there were losses here related to 2000 market implosion?

Sadly, we have summary info only back to 2001.

It would be an interesting irony to see the last bear market's last shoe drop to start a new bear market.

[Dinner]

Originally posted by DanS

Edit: And by the way, there's probably lots of other funny stuff included in that $190 billion in assets on GM's books.

What I don't get is if GM has $190 billion in assets and it's stock valuation is only $39 billion then why doesn't someone raid GM, buying it for $39 billion, take some of that $190 billion then sell it on? I mean if you can buy $190 billion in assets for just $39 billion then that's a hell of a deal even if the company has long term liabilities.

Wouldn't those unfunded or potential liabilities have to exceed $151 billion for the company's stock not to be under valued?

[DanS]

Click on balance sheet from the above Google Finance link. Assets are $187 billion, but liabilities are $190 billion -- i.e., GM's net worth or book value is negative $3 billion. This was before the $39 billion write down.

Put another way, over the entire history of the company, net of dividends, GM has lost a nominal $3 billion for its shareholders.

Also, it's tough to know how much of that $187 billion in assets is tied up in factories near Detroit and other such assets. Who has any use for abandoned car factories in Detroit? Good luck in finding a buyer at those prices.

[DAVOUT]

When you get that size of "surprise" from a world industrial leader, you come to believe that the accounting, the primary aim of which is to avoid any kind of financial surprise, has badly failed. Incidentally, based on their usual creativity, the Chineses who have been educated by the US accountants, will certainly offer soon great surprises ; they have already 2 companies in the first 10 stock values.