Sunday, March 18, 2007

Negative Book Value

In GM's 2005 10-K, in the risk factors section, the following statement is made:

"In addition, the Financial Accounting Standards Board (FASB) has announced that it is considering changes in the accounting rules for pensions and other postretirement benefits. The rule changes that are expected to be proposed in March 2006 would require a company to include on its balance sheet an additional net asset or net liability to reflect the funded or unfunded status, as the case may be, of its retirement plans. In light of the unrecognized losses associated with our pension and OPEB liabilities under existing accounting rules, if these expected proposed rules had been in effect as of December 31, 2005, the substantial additional liability that we would have had to include on our balance sheet would have caused our total stockholders’ equity to be negative."

The FASB went ahead with that rule change, and now GM's equity is indeed negative. See the line from the bottom, where total stockholder's equity has gone from a positive $14.653 billion to a negative $5.441 billion:

Based on the following table from GM's 2005 10-K, it could have been much worse based pension and benefit plans that appeared to be almost $70 billion underfunded with over $60 billion in unrecognized losses:

It appears that the huge employee buyout program implemented during 2006 saved the company many billions in future pension liabilities.

GM hopes to get further concessions from the union that would presumably allow them to reduce their pension liabilities and bring their equity up. On the other hand, GM's assumptions with regard to their pension plan performance may end up being too optimistic (this is how they ended up with so many unrecognized losses in the first place). Time will tell how much trouble GM's past pension plan accounting will cause for the company down the road.

On the asset side of the balance sheet, GM is including over $30 billion in deferred tax assets with $10.2 billion having been added as a result of the new pension and benefit accounting. For these to end up being of value the company either has to become highly profitable or somebody needs to buy out the company. With GMAC now out of the company's control and struggling because of its subprime lending operations, and with the company's negative equity, the stated value of deferred tax assets may have to be marked down in the future:

Will GM be able to achieve postive equity in the future?
Will GM be profitable?
Will GM go bankrupt?
You'll have to judge for yourself.


Anonymous said...

i was wondering, does GM engage any unethical business practices?

RodgerRafter said...


How you define unethical is up to you. Compared to most huge multinational corporations, GM is pretty good, in my view. They're especially good on corporate governance according to Institutional Shareholder Services. However, the company could be criticized for decimating the Detroit economy with it's downsizing and outsourcing efforts or for harming the environment by building and promoting too many gas guzzlers. Again, it's up to you what you call unethical.