Outside Audit
For GM, Pension-Accounting Shift
Could Dwarf Gain on GMAC Deal
By DAVID REILLY
April 5, 2006; Page C3

When it comes to General Motors Corp.'s balance sheet, it's one step forward and maybe a whole lot of steps back.

The sale by the struggling auto maker of a 51% stake in its General Motors Acceptance Corp. finance arm, announced on Monday, is expected to bring in about $10 billion when the deal closes in the fourth quarter. The transaction could bring the auto maker an additional $4 billion in the next three years.

Around the time the deal closes, though, a new accounting rule may take affect that would require GM and other companies to report their pension deficit or surplus on the balance sheet as an asset or liability. That's not the accounting standard now in place.

That means even if the GMAC sale increases GM's assets by about $10 billion, the auto maker could see a decrease in assets and increase in liabilities that would bring about $68 billion in unrecorded liabilities onto the balance sheet.

Those liabilities along with the assets gained by selling a controlling stake in GMAC, when applied to GM's 2005 balance sheet, would leave the company with shareholders' equity of about negative $43 billion. GM's shareholders' equity -- a net-worth figure that represents the difference between total assets and liabilities -- was $14.6 billion at the end of last year.

A spokesman for GM didn't return a call seeking comment.

That negative shareholders' equity number could worsen by as much as $21 billion, depending on whether, and by how much, GM decides to effectively write down deferred tax assets currently on its balance sheet. Such assets are a kind of rainy-day reserve that allow companies to use prior losses to offset taxes on future profits. The auto maker could be forced to do so if expected future losses mean the company wouldn't have profits to apply the deferred assets against. That outcome is more likely now that GM has sold the stake in GMAC, its sole source of profit.

Of course, the huge change in GM's shareholders' equity wouldn't present the company with a sudden crisis. Negative shareholders' equity doesn't mean a company is bankrupt or can't function. Rather, it's a warning sign showing that a company has depleted all the capital invested in it along with earnings built up over the years.

"Maybe some equity holders will say, 'Oh, my God,' " said Shelly Lombard, a bond analyst covering the auto sector at New York-based researcher Gimme Credit. "From the bonds' perspective, it's a negative, but if you're paying attention, you already knew it was there."

Plus, the liability related to pension and other post-retirement benefits that the company owes its workers represents future obligations. The payment from the GMAC-stake sale to a private-investor group led by Cerberus Capital Management, on the other hand, is cash the company will immediately have on hand to help restructure itself.

Still, crystallizing the size of its pension and other post-retirement benefit obligations on the balance sheet will hammer home to GM shareholders and creditors the company's perilous financial state. "It will do more to highlight the issue and bring it more into the forefront, although it's already very well incorporated into any assessment of the company," said Richard Hilgert, a credit analyst covering the auto sector with Fitch Ratings.

The accounting change also underscores that even if GM works its way out from under immediate problems, it has to overcome other hurdles. Namely, its big deficits leave the company in a "precarious financial situation" and call into question its ability to honor future obligations, according to a recent report on the auto sector by research and proxy advisory firm Glass Lewis & Co.

So how will things change on GM's balance sheet? Using current accounting rules, GM showed pension-related assets, for both U.S. and foreign plans, of about $32.9 billion at the end of 2005. Other post-retirement benefits, such as health-care expenses for retirees, show up as an about $34.1 billion liability. The rub: Those figures don't actually correspond to the assets and liabilities in GM's plans -- a disconnect seen on the balance sheets of myriad U.S. companies.

The new accounting rules being considered by the Financial Accounting Standards Board look to make the picture more realistic. If adopted, they would require GM to account for the actual funded status of its plans, which currently stay off the balance sheet and are only displayed in footnotes. According to notes to GM's 2005 financial statements, its pension plans are underfunded by about $4.6 billion, while other post-retirement benefits show a $64.5 billion deficit.

As a result, the FASB plan would call for GM to remove the pension-plan asset from the balance sheet and replace it with the liability related to the plan deficit. That would result in a $37.5 billion swing in GM's balance sheet. It would then also boost its other post-retirement plan liability by about $30.4 billion.

Write to David Reilly at david.reilly@wsj.com