Hardly any of the press coverage of General Motors' turn to a profit and preparation for a public offering has made mention of the point, but one significant factor for GM has not so much to do with the cars it makes but a lot to do with accounting. Unlike most other companies that go through bankruptcy, GM got to carry its losses though the process. That has the effect of increasing the New GM's after-tax cash flow, making the bailout look more positive, enabling quicker payback of loans, and denying taxpayers money in taxes from GM that the company might otherwise owe.
TheStreet.com gets at the issue in an article on GM's planned acquisition of AmeriCredit Corp.:
Accounting rules state that when companies have a better than 50% chance of earning enough money to make use of past losses to offset their tax bill they can claim the losses as an asset, often referred to as a "deferred tax asset." When companies have a history of repeated losses they must take a "valuation allowance" which is recorded as a liability.
Following its emergence from bankruptcy protection at the end of 2009 GM reported a valuation allowance -- which is a combination of previous year losses -- of just over $45 billion.
But if GM becomes consistently profitable again it can reduce the valuation allowance, converting the liability to an asset and giving a boost to earnings and book value.
Thanks to FutureOfCapitalism.com reader-participant-watchdog-community member-content co-creator F. for the tip.