GM Takes $39 Billion Charge On Tax Offset

by Leroy Baker, Tax-News.com, New York

07 November 2007

US automotive giant General Motors Corp. has announced that it will record a net non-cash charge of $39 billion for the third quarter of 2007, related to establishing a valuation allowance against its deferred tax assets (DTAs) in the US, Canada and Germany.

GM revealed in a statement released on November 6 that in accordance with the Financial Accounting Standards Board (FASB) guidelines, it has evaluated its DTAs quarterly to determine if valuation allowances were required.

As previously disclosed by GM in 2006, the company had determined in prior periods that a valuation allowance was not necessary for its DTAs in the US, Canada or Germany based on several factors, including the degree to which the company’s three-year historical cumulative losses were attributable to special items or charges, several of which were incurred as a result of actions to improve future profitability; the long duration of its deferred tax assets; and the expectation of continued strong earnings at GMAC Financial Services and improved earnings in GM North America.

The FASB's Statement of Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes' require that a valuation allowance should now be established due to more recent events and developments during the 2007 third quarter. A significant negative factor was the company’s three-year historical cumulative loss in the third quarter of 2007 in the US, Canada and Germany on an adjusted basis.

Another significant factor was the ongoing weakness at GMAC Financial Services related to its Residential Capital, LLC (ResCap) mortgage business, including substantial US losses incurred in 2007. Finally, the company faces more challenging near-term automotive market conditions in the US and Germany.

Commenting on the announcement, Fritz Henderson, GM vice chairman and chief financial officer, stated that the establishment of a valuation allowance "does not have any impact on cash, nor does such an allowance preclude us from using our loss carryforwards or other deferred tax assets in the future".

“It’s also important to note that the establishment of a valuation allowance does not reflect a change in the company’s view of its long-term automotive financial outlook,” Henderson added. “GM continues to believe that its new product introductions, combined with the new GM-UAW labor agreement, once fully implemented, will significantly improve GM’s competitive position in the US and better position the company to utilize tax benefits in the US and Canada in the future.”

SFAS No. 109 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook, and a recent three-year historical cumulative loss is considered a significant factor that is difficult to overcome.

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