GM Deferred taxes

not really understanding the cause of GM deferred tax situation. someone have a quick explanation and is this above our level at this point?

This is the situation: General Motors to record non-cash charge of $39 bln for a deferred tax valuation allowance in its Q3 financial results (GM) 36.16 +0.16 : Co announced it will record a net non-cash charge of $39 bln for Q3 of 2007 related to establishing a valuation allowance against its deferred tax assets (DTAs) in the U.S., Canada and Germany. In accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, GM has evaluated its DTAs quarterly to determine if valuation allowances were required. As previously disclosed in GM’s 2006 Form 10-K, GM had determined in prior periods that a valuation allowance was not necessary for its DTAs in the U.S., Canada or Germany based on several factors, including the degree to which the co’s three-year historical cumulative losses were attributable to special items or charges, several of which were incurred as a result of actions to improve future profitability; the long duration of its deferred tax assets; and the expectation of continued strong earnings at GMAC Financial Services and improved earnings in GM North America. ----------------------------------------------------------------------------------------------------------- They are taking a valuation allowance (contra account) against their Deferred Tax Asset, which means they are placing a meaningful probability they will not have sufficient earnings (income) to realize the full benefit of their Deferred Tax Asset (remember, DTA reduces taxable income). If there is no income, there is no use for the DTA, which means they need to reflect this in their financial statements. An increase in the valuation allowance serves to reduce NI, but has no effect on CF’s since there is no cash moving. As GM is increasing their valuation allowance, this has reduced NI for the current period. Remember, they can always reduce the valuation allowance at a point in the future, which will have the opposite effect of increasing NI.

ooooooh! awesome! thanks finance03. completely understand now. and yes we do need to know this for the test. ha! thanks!!