Is GM a “Going Concern”? Wait and See

In reporting a near-record 2008 loss, the automaker says auditor Deloitte is expected to raise the question in its opinion. CFO Young discusses its...
Stephen Taub and Roy HarrisFebruary 26, 2009

General Motors warned that it anticipates receiving a “going concern” opinion from its auditors, underscoring in yet another way the depth of the embattled automaker’s financial problems.

GM said the company and its auditor, which is Deloitte & Touche, “must determine whether there is substantial doubt about GM’s ability to continue as a going concern.”

Against this backdrop, the company noted its viability plan, filed with the Treasury Department on Feb. 17, included a request for additional funding from Treasury, as well as support from other governments outside of the U.S. “GM requires this funding in 2009 to continue operations until global automotive sales recover and its restructuring actions generate benefits, resulting in the company being able to fund its own operating requirements,” the company said.

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In a conference call with reporters, conducted from Washington, D.C., GM CFO Ray Young said: “They are in fact-gathering mode right now, and so we are here in order to respond to their questions.” According to a Reuters report on the call, Young added that the talks are “not a negotiation session by any means. They are going to continue to gather facts and continue to ask for clarifications in terms of our submissions.”

The sober warning about the position that Deloitte probably will take accompanied GM’s fourth-quarter report, which showed that in 2008, excluding special items, the automaker lost $16.8 billion, or $29 per diluted share. This compares to an adjusted net loss of $279 million in 2007. GM said the loss was driven by the impact of the U.S. recession and subsequent global contagion. Including special items, the company reported a loss of $30.9 billion in 2008.

Last year “was an extremely difficult year for the U.S. and global auto markets, especially the second half,” chairman and CEO Rick Wagoner said. “These conditions created a very challenging environment for GM and other automakers, and led us to take further aggressive and difficult measures to restructure our business.We expect these challenging conditions will continue through 2009, and so we are accelerating our restructuring actions.”

Reuters noted that this was the second-largest annual loss in the 100-year history of the company, trailing only the $38.7-billion 2007 loss.

CFO Young told reporters that the quarter’s loss reflected how the U.S. auto slump had evolved into a global crisis, which the company having posted losses on auto operations in every region, including Asia. “When we talk about contagion, what we saw was that the credit crisis was starting to spread,” Young said, according to the news report.

GM has fallen behind smaller rival Ford Motor in lining up a union deal to restructure retiree healthcare debt under terms of the federal bailout. And GM’s negotiations with bondholders have been even more difficult, Reuters reported, noting that the bondholders have been asked to accept a payout of $9 billion of the $27 billion they are owed. CFO Young said the company couldn’t comment on the negotiations before the end-of-March deadline to launch the debt exchange.

“We are getting to a more sensitive stage in terms of the whole bond exchange process here. From our perspective, we are marching toward the March 31 deadline,” he said.

The fourth quarter 2008 results reflected special items of $3.7 billion, led by a $1.1-billion impairment charge primarily relating to actions involving the Hummer and Saab brands and $1 billion from adjustments to the value of deferred tax assets in various countries outside of the U.S. Also included were $900 million of restructuring and capacity-related costs, a $660 million increase in the Delphi reserve relating to the valuation of future pension obligations, $610 million of gross goodwill impairments in Europe and North America, and a $533 million net gain relating to GM’s portion of the GMAC bond exchange gain, net of an impairment taken on GM’s holdings in GMAC.

Last October, the Financial Accounting Standards Board issued a proposed statement dealing with the requirement that companies assess their ability to continue as a going concern, and directed company officials to file results on a going-concern basis unless management intended to liquidate or cease operations, or if it envisioned that there as no “realistic alternative” but to do that.