Accounting & Tax

GM to Restate; Also Adds $2B of Red Ink

Restatement stems from incorrect classification of cash flows at the auto giant's residential mortgage unit; GM restructuring charges, Delphi liabi...
Stephen TaubMarch 17, 2006

General Motors Corp. has veered off its already bumpy road.

The embattled auto giant has announced that it will restate financials for the five years ended 2004 due to an accounting issue at ResCap, a residential mortgage unit that is a subsidiary of General Motors Acceptance Corp. For certain mortgage-loan transactions, GM explained, ResCap incorrectly classified cash flows from investing activities as cash flows from operations.

GM stated that the revisions will not affect net income or the balance sheet but will affect the statement of cash flows for 2005 and prior periods at ResCap, GMAC, and GM. The company added that the impact may be material in some or all of the affected periods.

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GM also followed up on a November filing in which it disclosed that it would restate its financials for 2001 and subsequent periods to correct its accounting for supplier credits. On Friday the automaker stated that it hopes to file its annual report and the restatements within the next two weeks. At that time, GM also expects to increase its reported loss by $2 billion, to $10.6 billion, due to adjustments for three charges. They include an increase in the previously announced North American restructuring charge, an increase to the contingent liabilities associated with Delphi Corp.’s Chapter 11 filing, and recognition by GM of the previously reported noncash goodwill impairment charge of $439 million (after tax) at GMAC.

Elaborating on the restatement announced in November, GM disclosed that it incorrectly recorded as a reduction to cost of sales certain payments and credits received from suppliers prior to the completion of the earnings process. The company concluded that those payments and credits “should be recognized when subsequently earned.”

The effect of these errors was a reduction in pretax income of $52 million in 2000, a reduction of $405 million in 2001, a reduction of $69 million in 2002, an increase of $7 million in 2003, and a reduction of $26 million in 2004. After the restatement is completed, a deferred credit of about $548 million (pretax) would exist as of December 31, 2004, which will be recognized as a reduction of cost of sales in future periods, GM added.