GM to Take $39 Billion Hit

Third-quarter results will show a massive charge on a valuation allowance.
Author:
Publish date:

Updated from 6:10 p.m. EDT

General Motors

(GM) - Get Report

will record a $39 billion charge in its third-quarter results to reflect the establishment of a valuation allowance against deferred tax assets.

GM's third-quarter report, due Wednesday morning, was already

expected to be weak amid troubles at GMAC's mortgage unit and bleak sales in North America, but the charge will plunge the automaker's results far deeper in the red than Wall Street expected.

GM said accounting rules require the charge because of a three-year cumulative adjusted loss for its operations in the U.S., Canada and Germany, as well as ongoing weakness at ResCap, the mortgage firm owned by GMAC. GM still holds a 49% stake in GMAC.

In addition, GM said it now faces more challenging near-term automotive market conditions in the U.S. and Germany.

Valuation allowance charges are triggered by the belief that deferred tax benefits a company had expected to record may not be realized. That can happen if a company doesn't expect to be profitable in the near future, preventing the use of loss carryforwards as a tax benefit.

"The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from using our loss carryforwards or other deferred tax assets in the future," said Fritz Henderson, GM vice chairman and chief financial officer, in a statement. "It's also important to note that the establishment of a valuation allowance does not reflect a change in the company's view of its long-term automotive financial outlook."