GM, the bailed-out US car giant, magically made $32 billion appear.
Often, unusual accounting results are, oddly, created by the accounting rules. It begs the question: how could one of GM’s largest assets be an intangible asset such as goodwill (listed at US$30.2 billion or A$32.57 billion), when only a year prior the company emerged from bankruptcy protection?
GM advised that under fresh-start reporting, goodwill would not have been registered if all its identifiable assets and liabilities were recorded at their fair market values. But, GM noted that some liabilities, primarily related to employee benefits, were recorded at amounts that exceeded fair value. The company claimed the decision was within the bounds of allowable treatment under US accounting standards.
‘The difference between those liabilities’ carrying amounts and fair values gave rise to goodwill.’ As the difference increases, so too does the amount of goodwill that GM is able to record. In other cases, GM advised that certain tax assets were recorded for less than their fair value, which again resulted in goodwill. For example, on the GM balance sheet the fair values of liabilities were lower than the carrying amounts. This was possible due to GM using higher discount rates to calculate fair values, which essentially drove fair value amounts lower.
GM also noted that they took into account the risk of default. If GM’s creditworthiness improves, this would reduce the difference between the liabilities’ fair values and carrying amounts.
In summary, as GM grows ever more creditworthy and stable, ‘the less its goodwill assets may be worth in future’.

QUESTIONS

1, What is the relationship between liabilities and the recording of goodwill?
2, Explain how GM can argue that because it has a higher risk of default the fair value of the liabilities would be lower than their carrying amount.
3, Discuss what would be most relevant to the users of GM’s financial statements with regards to the valuation of the liabilities.

Answer rating: 100% (QA)

Answer 1 Relationship between liabilities and the recording of goodwill The difference between thos... View the full answer