The NYT is a general-interest newspaper, which should be comprehensible to
a broad reading public. And certainly me. But even the NYT can’t seem to explain
going on at GM. What does this mean?
DETROIT, Nov. 7 — General Motors reported its largest quarterly loss
ever today after it took a huge noncash charge to write down deferred tax
The NYT does note that "GM’s $39 billion overall loss equals $68.85
a share, nearly double the company’s closing stock price Monday."
So if it’s just lost $68.85 a share, how come the stock is worth anything at
This is the kind of story which journalists hate. They’re not accountants,
and when they phone up accountants to ask what’s going on, they get the kind
of answer which makes perfect sense to accountants, but which is very hard to
translate into English. And besides, they’re on deadline.
Galloping to the rescue this morning, however, is blogger extraordinaire
Steve Waldman, who does his best to explain
what’s going on. But first he makes sure to let us know that things are
actually even worse than they might seem at first glance:
Check out GM’s top-level balance
sheet last quarter (the quarter ending Jun-07). Look at the line called
"Total stockholder equity". Yes, it really does say negative 3.5
A $30B net charge would bring GM’s accounting equity down to negative 33 billion
Is that a record? What’s the maximum negative accounting equity ever reported
by a going concern? Or, consider this: GM is not a penny stock. The market
imputes a lot of real value to those claims worth negative dollars on its
balance sheet. GM’s market cap as of yesterday was about $20.5B. That’s a
Surely there comes a point where stock-market valuations and accounting valuations
have to be on at least speaking terms with each other. But in the case of GM,
at least, it seems, that point is probably a very long ways off.
But anyway, back to those deferred tax credits. Here’s Steve’s explanation
– thanks, Steve!
For those who want to know, "deferred tax assets" arise when firms
recognize expenses before they are allowed to take a tax deduction for those
expenses. Let’s say a large New York bank decides some of its assets are worth
10B less than originally thought, and writes those assets down on its balance
sheet. If the bank pays a 35% tax rate, 3.5B of that "loss" should
eventually be absorbed by the government in the form of reduced tax payments.
But companies don’t get to pay fewer taxes whenever they change their estimate
of the value of an asset. The bank gets a cash write-off on its taxes only
when the assets are actually sold and the firm realizes a loss. In the meantime,
the firm recognizes a 3.5B "tax asset", the value of the future
tax savings it expects. This is all perfectly legitimate — writing down
the assets without recognizing the expected tax-savings would badly overstate
costs. But sometimes a firm’s estimate of future tax savings turns out to
be wrong. Say the bank is forced to sell the impaired assets when it is already
losing money. Then there is no immediate tax savings, because the bank wouldn’t
have paid taxes that year anyway. The firm may still be able to "carryforward"
the loss, and recover some of the tax savings. Or it may not. Tax laws are
GM had previously estimated that it had $39B in future tax write-offs coming
to it. Its accountants now think the company might never get the chance to
use them. Though this is not a cash charge, it is not a good omen either.
Firms realize tax assets when they are profitable enough to have a large tax
bill to take deductions from. GM is basically announcing that it’s unsure
it will earn enough money to be able to take advantage of its pent-up tax
offsets before they expire. Tax asset write-offs are insult-to-injury kind
of events. Firms get hit with the accounting charge when, and precisely because,
they can’t make enough money to have a tax liability to escape from.
Tax asset write-offs might also be a signal of distress, indicating that a
firm lacks the flexibility to time its loss realizations advantageously. Tax
laws are complicated, and sometimes tax benefits expire regardless of what
a firm does. One mustn’t draw conclusions. Still, it does make you wonder.