Tuesday, June 2, 2009

Should The US Consolidate GM Onto Its Financial Books?

Would the US government have a controlling interest in GM, if it were required to follow the same accounting rules as business?

If Berkshire Hathaway owned 50 percent or more of GM, Berkshire would be required to issue a consolidated income and balance sheet statement that included GM. GM's assets, debts and earnings would be added to the comparable Berkshire accounts, subject to the removal of any transfers between the two entities.

The US investment in GM will result in the US owning 60 percent of the equity of GM. That is higher than the level of ownership required for issuing consolidated accounting statements under generally accepted accounting standards.

A consolidation into US's financial reports would replace the equity investment in GM with the auto company's assets and debts, and the increase in US debt needed to invest in GM. The consolidated US budget would include GM losses or profits. Additionally, the government's purchase of GM cars would become an intra-entity transfer and not a sale.

The trend these days is to issue consolidated statements in business. For example, rules are changing so that bank accounting statements include the off balance sheet entities that hold their securitized mortgages.

Statement of Federal Financial Accounting Standards No. 24 requires government agencies to follow generally accepted accounting standards unless specifically excluded. SFFAS No. 24 requires the government to publish a Consolidated Financial Report of the United States Government. I have not reviewed the relevant law for the US's investment in GM and the ownership of its 60 percent equity stake, but I am assuming it exempted the US from treating the investment in GM like a business would.

If the US had to consolidate a GM entity into its financial statements, there probably would have been more transparency about the benefit and nature of the investment and there would have been more criticism of the GM investment.

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