GM's announcement of a $38.6 billion loss yesterday
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Joined: Jul 1999
Posts: 3,647
From: Winnipeg, Manitoba, Canada
GM's announcement of a $38.6 billion loss yesterday
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.
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.
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Joined: Jun 2000
Posts: 3,463
From: SoCal
The loss did seem like a tremendous amount for a 3rd gtr. and it didn't seem like GM was any worse off than 2006 in all of its sales reports so it was a surprise. But FASB or not $38.6B is a lot of money regardless of the accounting. If GM still didn't have some serious financial issues this would not have happened. I guess they have a longer way to go than we (I) thought.
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Joined: Aug 2001
Posts: 2,400
From: Michigan's left coast
Buried in that "paper" loss was a real loss of $1.6B. That's not good news.
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Joined: Mar 2005
Posts: 3,123
From: Melbourne, Australia
OT
You know, that article is the most straight forward explanation I've read thus far. Even I understood it.
Most articles just have too much accounting jargon which does nothing for the average person to comprehend! I even wonder whether some of 'them' understand.
You know, that article is the most straight forward explanation I've read thus far. Even I understood it.
Most articles just have too much accounting jargon which does nothing for the average person to comprehend! I even wonder whether some of 'them' understand.
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