Accounting & Tax

Automakers Steered Toward New Accounting

The SEC wants the companies to show that the cash flows from dealer financing and leases come not from investment, but from operations.
Stephen TaubMarch 2, 2005

The Securities and Exchange Commission has asked automakers to change their accounting for cash flow from dealer financing and leases, according to wire-service reports. The requested changes could eventually affect other industries where finance units are widely used.

In January, reported Dow Jones, the SEC fired off letters to the chief financial officers of auto manufacturers, asserting that their current accounting practices don’t comply with generally accepted accounting principles. According to the report, the commission does not believe that accounting fraud has been committed by any of the companies, nor is it asking them to restate prior results.

Instead, the SEC is insisting that automakers account for the leases correctly in the future and provide “prominent disclosure” of past impact going back three years, according to the report.

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The revisions also will not change the companies’ overall net cash flow. “It’s just the classification that’s wrong,” Carol Stacey, chief accountant in the SEC’s corporation finance division, told Dow Jones. However, the change could reduce net cash flow from operations, which is what lenders and investors like to look at, according to Reuters.

Essentially, the SEC wants the companies to show that the cash flows from dealer financing and leases come not from investment — which has long been the practice in the auto industry, according to Dow Jones — but from operations. The wire service pointed out that once the automakers comply, cash from operations may be reduced at companies with many new leases. However, the impact on short-term financing of less than 90 days might barely make a dent, the wire service added.

Charles Mulford, director of Georgia Institute of Technology’s Financial Analysis Lab, which is credited for initially raising this issue, told Dow Jones that he believes GM’s cash flow from operations will be halved for 2003, while Ford’s will be cut by just 10 percent. He did not offer estimates for 2004.

Jeffrey Baliban, a senior vice president at NERA Economic Consulting, told Reuters that for some companies, another consequence of the SEC request could be changes in certain debt covenants. Some of them have “requirements under various debt instruments to maintain certain ‘cash flow from operations’ ratios,” he told the wire service.