It will be a long time before General Motors Co. can shake the stigma of being called Government Motors. Heres another nickname for the bailed-out automaker: Goodwill Motors.
Sometimes the wackiest accounting results are the ones driven by the accounting rules themselves. Consider this: How could it be that one of GMs most valuable assets, listed at $30.2 billion, is the intangible asset known as goodwill, when its been only a little more than a year since the company emerged from Chapter 11 bankruptcy protection?
Thats the amount GM said its goodwill was worth on the June 30 balance sheet it filed last month as part of the registration statement for its planned initial public offering. By comparison, GM said its total equity was $23.9 billion. So without the goodwill, which isnt saleable, the companys equity would be negative. This is hardly a sign of robust financial strength.
GM listed its goodwill at zero a year earlier. Its as if a $30.2 billion asset suddenly materialized out of thin air. In the upside-down world that is GMs balance sheet, thats exactly what happened.
Indeed, the companys goodwill supposedly is worth more than its property, plant and equipment, which GM listed at $18.1 billion. The amount is about eight times the $3.5 billion GM is paying to buy AmeriCredit Corp., the subprime auto lender. Another twist: GM said its goodwill would have been worth less had its creditworthiness been better. Talk about a head- scratcher. (More on this later.)
Not Normal
This isnt the way goodwill normally works. Usually it comes about when one company buys another company. The acquirer records the other companys net assets on its books at their fair market value. It then records the difference between the purchase price and the net assets it bought as goodwill.
The origins of GMs goodwill are more convoluted. Shortly after it filed for bankruptcy last year, GM applied whats known as fresh-start financial reporting, used by companies in Chapter 11. Through its reorganization, GM initially slashed its liabilities by about $93.4 billion, or 44 percent. Under fresh- start reporting, though, GMs assets rose by $34.6 billion, or 33 percent, mainly because of the increase to goodwill.
GMs explanation? The company said it wouldnt have registered any goodwill under fresh-start reporting if it had booked all its identifiable assets and liabilities at their fair market values. However, GM recorded some of its liabilities at amounts that exceeded fair value, primarily related to employee benefits. The company said the decision was in accordance with U.S. accounting standards on the subject.
Funky Numbers
The difference between those liabilities carrying amounts and fair values gave rise to goodwill. The bigger the difference, the more goodwill GM booked. In other instances, GM said it recorded certain tax assets at less than their fair value, which also resulted in goodwill.
On the liabilities side, for example, GM said the fair values were lower than the carrying amounts on its balance sheet because it used higher discount rates to calculate the fair value figures. The higher discount rates took GMs own risk of default into account, which drove the fair values lower.
Heres where it gets really funky. If GMs creditworthiness improves, this would reduce the difference between the liabilities fair values and carrying amounts. Put another way, GM said, the goodwill balance implied by that spread would decline. That could make GMs goodwill vulnerable to writedowns in future periods, which would reduce earnings.
Unexpected Outcome
A similar effect would ensue on the asset side if GMs long-term profit forecasts improved. Under that scenario, GM could recognize higher tax assets and bring their carrying amount closer to fair value, narrowing the spread between them.
So, to sum up, the stronger and more creditworthy GM becomes, the less its goodwill assets may be worth in the future. An intuitive outcome, this is not.
Theres a broader storyline here. Normally when companies go public, theyre supposed to be prepared from a business and financial-reporting standpoint to take on the responsibilities of public ownership. GMs IPO, of course, is a much different animal. Taxpayers already own most of the company. Now the government is trying to unload its 61 percent stake back onto the investing public, though it may take years before the government can sell it completely.
Fluffy Balance Sheet
At this point, GMs balance sheet remains loaded with fluff, as the goodwill illustrates. GM said its August deliveries were down 25 percent from a year earlier, so its not as if business is booming. Moreover, GM disclosed that it still has material weaknesses in its internal controls, which is a fancy way of saying it doesnt have the necessary systems in place to ensure its financial reporting is accurate.
This being the political season, the Obama administration has made clear that it wants GM to complete the IPO this year, so the president can claim a policy success. Its bad enough GM needed a taxpayer bailout. What would be worse is taking the company public again prematurely.
This much is certain: The next time GM wants to create $30 billion out of nothing, it wont be so easy.
http://www.bloomberg.com/news/2010-...rom-thin-air-commentary-by-jonathan-weil.html
I don't have any true accounting knowledge, so i am not going to comment, just post this here to see what those who know accounting can say...
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