Behold the Power of Accounting

Here I thought GM was losing money. I mean, the company did say it lost $323 million for the first quarter. I usually don’t take those sorts of announcements lightly.
But the great thing about GM is that if you don’t like a number on their income statement, you’re perfectly free to choose another. Go ahead. In fact you can just fill in your own! That’s exactly what GM did, and they settled on one of them “positive” numbers.
Eighteen days after reporting a loss, GM now says that it really make $445 million for the first quarter. Why the change? Accounting, silly.

The health-care agreement between GM and the United Auto Workers union requires the automaker to set aside $1 billion annually in 2006, 2007 and 2011 to offset increased health-costs to retired workers, according to a U.S. regulatory filing on March 31. Union retirees will pay premiums for the first time. It is part of an agreement to get a pretax health-care savings of about $3 billion a year from union workers.
Preliminary Results
GM had initially reported a first-quarter cost of $681 million, or $1.20 a share, for the first $1 billion payment to establish the health-care fund. GM Chief Financial Officer Fritz Henderson said at the time that the automaker was still talking to the SEC about how it should account for the payment.
The company had said the health-care accord will help it reduce structural costs by an annualized rate of $7 billion by the end of this year, with $4 billion in savings in 2006. The automaker today increased the savings to $4.5 billion based on the accounting ruling.

Bloomberg quotes one analyst as saying “The SEC backed off.” This, of course, has zero effect on the company’s operations, however the stock is rallying on the news.

Posted by on May 9th, 2006 at 9:50 am


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