Accounting Observer > Public Blog - That "Surprising" Charge

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That "Surprising" Charge

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	3/27/2006 7:38 AM
Last week, I mentioned General Motors' announcement of its expected delay in filing its 10-K. I noted, in the context of the 8-K only, its curious disclosure that the "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." In lease-speak, that means that the residual value of leased cars - representing the amount of money GM expected to get from end-of-lease disposal of cars returned to it -had been upped once in 2005 before it should have been. Now it's being written down. The blogger known as "Iocaste" at Fantasy Life pointed to me that GMAC's 2004 10-K brings home the nature of the write-up/writedown a little more clearly: "GMAC bears the risk of loss to the extent that the value of the vehicle upon remarketing is below the residual value estimated at contract inception. GMAC primarily uses published residual guidebook values in establishing standard residual values at contract inception. These projected values may be upwardly adjusted as a marketing incentive if General Motors considers an above-market residual appropriate to encourage consumers to lease vehicles. Such residual support by GM results in a lower monthly lease payment by the consumer. General Motors reimburses GMAC for its portion of these increased residual values, to the extent remarketing sales proceeds are less than the contract residual at termination." Judging by that disclosure, GMAC starts out with one figure for residual values; if GM decides it needs to prod sales by offering lower lease payments, then an "above-market" residual is employed by GMAC to get juice flowing. In the end, if GMAC doesn't get the "above-market" residual (why would it? the market price is what it is), then GM is on the hook for the difference between what GMAC gets and what it recorded as residual values. It sounds like GM is now taking action to clean up the portfolio values - probably a necessary step provoked by its efforts to shop around GMAC. Once you see this, you begin to wonder how much similar dross is floating around in the portfolios of other auto companies and other firms with captive financing subs.

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