How GM Made $30 Billion Appear Out of Thin Air

Discussion in 'Wall St. News' started by THE-BEAKER, Sep 10, 2010.

  1. NICE - nothing like some good old creative accounting.

    It will be a long time before General Motors Co. can shake the stigma of being called Government Motors. Here’s another nickname for the bailed-out automaker: Goodwill Motors.

    Sometimes the wackiest accounting results are the ones driven by the accounting rules themselves. Consider this: How could it be that one of GM’s most valuable assets, listed at $30.2 billion, is the intangible asset known as goodwill, when it’s been only a little more than a year since the company emerged from Chapter 11 bankruptcy protection?

    That’s the amount GM said its goodwill was worth on the June 30 balance sheet it filed last month as part of the registration statement for its planned initial public offering. By comparison, GM said its total equity was $23.9 billion. So without the goodwill, which isn’t saleable, the company’s equity would be negative. This is hardly a sign of robust financial strength.

    GM listed its goodwill at zero a year earlier. It’s as if a $30.2 billion asset suddenly materialized out of thin air. In the upside-down world that is GM’s balance sheet, that’s exactly what happened.

    Indeed, the company’s goodwill supposedly is worth more than its property, plant and equipment, which GM listed at $18.1 billion. The amount is about eight times the $3.5 billion GM is paying to buy AmeriCredit Corp., the subprime auto lender. Another twist: GM said its goodwill would have been worth less had its creditworthiness been better. Talk about a head- scratcher. (More on this later.)

    Not Normal

    This isn’t the way goodwill normally works. Usually it comes about when one company buys another company. The acquirer records the other company’s net assets on its books at their fair market value. It then records the difference between the purchase price and the net assets it bought as goodwill.

    The origins of GM’s goodwill are more convoluted. Shortly after it filed for bankruptcy last year, GM applied what’s known as “fresh-start” financial reporting, used by companies in Chapter 11. Through its reorganization, GM initially slashed its liabilities by about $93.4 billion, or 44 percent. Under fresh- start reporting, though, GM’s assets rose by $34.6 billion, or 33 percent, mainly because of the increase to goodwill.

    GM’s explanation? The company said it wouldn’t have registered any goodwill under fresh-start reporting if it had booked all its identifiable assets and liabilities at their fair market values. However, GM recorded some of its liabilities at amounts that exceeded fair value, primarily related to employee benefits. The company said the decision was in accordance with U.S. accounting standards on the subject.

  2. Even after acing a handful of accounting classes, I still couldn't figure out any meaningful and honest way to quantify "goodwill" on the balance sheet. Seems like a sham.
  3. While their particular "goodwill" value is questionable, every existing business has goodwill. It is repeat buyers (like 50-80 year olds who keep returning for Caddies, Camaro or Corvette buyers, etc.

    Honda and Toyota have enormous goodwill for building cars that are expected to last 200-300K miles, rather than. Of course, Toyota cashed a lot of that in (lost some) due to all the recent problems.

    Goodwill is what would make someone pay a lot of money for an existing restaurant or business that seems to always have a lot of customers.

    GM has an 80+ year history of goodwill/track record. What it is worth now is anyone's guess...
  4. It's the "Summer of 1999" all over again! :eek: :D :(