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GM Pulls It Together

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	3/20/2006 7:52 AM
Maybe this is it... Friday, General Motors outlined its reasons for delaying the filing of its 2005 10-K. Much of the reason for the delay had to do with restatements of amounts from prior years: the resolution of its investigation of the way it accounted for supplier credits (improperly initially recognizing them as income); its incorrect accounting for agreements with Delphi when it cut the sub loose; its faulty accounting for inventory as a sale rather than a financing transaction; and in what may be the conclusion of a long-running SEC investigation into pension assumptions among the automakers, a revision of assumptions in GM's other post-employment benefits accounting that recast the last three years' worth of statements. Throw in revisions to previously announced restructuring charges, more goodwill impairments, and you wonder if there's anything left to revise. Then there's another 8-K warning about another revision to the cash flow statements : "... GM intends to make certain adjustments to restate previously reported 2005 financial results. The restatement of quarterly financial results will primarily result from a material misstatement in the accounting for GM's portfolio of vehicles on operating lease with daily rental car entities, which occurred in the first quarter of 2005. This misstatement related to the fact that GM's portfolio of vehicles on operating lease with daily rental car entities, which was impaired at lease inception, was prematurely revalued in 2005 to reflect increased anticipated proceeds upon disposal. The restatement of the consolidated financial statements for the period ended March 31, 2005 will not change the net increase (decrease) in cash and cash equivalents in the above-referenced financial statements nor will it materially affect GM's 2005 total annual financial results, cash flows, or year-end financial position." That's a pretty curious statement: the lease portfolio was impaired at inception? One wonders what kind of deals were being pursued. Revising the residual value, as the statement implies was done, is a pretty simple way to avoid the impairment charge. And as the revision implies, it's not the right way. There are two larger implications: one, this is yet another example of the ongoing purification of cash flow statements. While GM's statement doesn't imply the SEC had any hand in the restatement of cash flows, you have to believe that the SEC's recent interest in cash flow statements has been noticed by GM's finance and accounting staff. Two, more broadly, GM appears to be serious about getting its financial reporting act cleaned up for good; there's no better time than the end-of-year audit. GM is in a war for its survival and prosperity, and the sinews of war are infinite money (according to Cicero). GM needs the infinite money in the wells of the capital markets, and this may be the moment when it finally confronts its past and deals with it - at least as far as financial reporting goes. Let's hope so.

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