"It used to be said that what was good for General Motors was good for America. If so, the US needs to be seriously worried. The car giant has just reported a $10.6bn loss for 2005, including a $2bn loss relating to an accounting error at its mortgage subsidiary Residential Capital Corp."
The crisis afflicting General Motors – and it is a crisis, with some commentators speculating that it is heading for bankruptcy protection – has led to the urgent sale of some commercial interests, including the finance arm GM Acceptance Corps (GMAC), sold for $7.4bn plus annual royalties of around $100m. GM has also sold its stake in Isuzu car manufacturers for $300m.
General Motors has admitted that even before making its dire financial statement, the corporation had dramatically scaled back its research and development expenditure when it became clear that the company was heading for a large loss – equivalent to about $20 per share. Much of the GM crisis arises from its commitments to current and former staff on healthcare and pensions. The corporation’s recovery plan aims to reduce staff by 30,000, cut healthcare liabilities by $15bn and reduce its long-term pensions liability by $1.6bn.
But the impression of GM’s underlying weak financial position has not been helped by the notable accounting failures at the Residential Capital Corp subsidiary (ResCap). A review of the situation at ResCap determined that some mortgage activities were not properly classified as either operating cash flows or investing cash flows. This led to the need for GM to restate its financial reports for 2002 to 2004 and for the first three quarters of 2005, with the effect of reducing operating cash flows and increasing investing cash flows. GM then had to admit that its consolidated financial statements for the same periods could no longer be relied upon.
Source:
Student Accountant, ACCA, May 2006 Issue
Link:
http://newsweaver.co.uk/accastudent/e_article000573706.cfm?x=b7k336V,b2BnGQM6