I never understand articles that begin with headlines this one: "GM Faces a New Threat to Its Books: Shareholder Equity Stands To Vanish if Pensions Become Liability via Proposed Rule." GM's shareholder equity has already vanished in the sense that if GM were to liquidate tomorrow and pay off its bondholders and pension obligations, there would be nothing left. GM has a positive stock price because people think the company will--or, rather, might--make enough profits as a going concern that there will be something left after bondholders, pensioners and health plans are satisfied. In what way is making the accounting numbers reflect the financial reality a "threat"?

WSJ.com - Tracking the Numbers: GM Faces a New Threat to Its Books: Shareholder Equity Stands To Vanish if Pensions Become Liability via Proposed Rule By MICHAEL RAPOPORT: A review of General Motors Corp.'s 2005 would include billions of dollars in losses, tepid sales and high costs. A fresh year may bring fresh financial woes: If accounting rule makers proceed with a plan to compel companies to account for their pension plans on their balance sheets, GM might suffer more than any other firm. Such a change may even wipe out most or all of the auto maker's shareholder equity, which is another way of saying that when all of GM's liabilities are subtracted from its total assets, little or nothing may be left.

Current rules let companies overstate the value of their pension plans. Even companies with plans that face major shortfalls can show a net asset, thanks to assumptions behind pension accounting. Sometime next year, the Financial Accounting Standards Board, which sets U.S. accounting rules, aims to make a change to require many companies to show a liability from pensions instead of a net asset. GM's shareholder equity might tumble by more than $24 billion, analysts' calculations show.

"In terms of absolute dollars, [GM's] balance sheet would get hit hardest," says David Zion, an accounting analyst at Credit Suisse First Boston. Should GM's already hurting shareholders, who have watched their stock fall in value to 20-year lows, care about what happens to a financial metric such as shareholder equity? In theory, shareholder equity is the value left for investors if a company were to liquidate itself and pay off all of its creditors. No one has said GM is going to do that, but some on Wall Street (and some credit-derivative traders) have bet on a bankruptcy filing. GM says it won't file for protection from creditors, but were it do so, shareholder equity would be more than theoretically important....

Right now companies reflect pensions on their balance sheets essentially by counting the difference between the total contributions they have made to their pension plans and the total pension costs they have had to recognize. This approach doesn't include a variety of negative items, especially losses incurred by pension-plan assets that companies haven't had to recognize as part of earnings but are real nonetheless.... GM shows a net asset of $30.2 billion from its pension plans on its year-end 2004 balance sheet, even though the plans were actually underfunded by about $7.5 billion at that point. FASB's plan would essentially take the positive $30.2 billion figure off GM's balance sheet and replace it with the negative $7.5 billion.

That is a swing of about $37.7 billion, on a pretax basis. Assume the standard 35% corporate-tax rate, the analysts say, and the deficit would become $24.5 billion, the estimated amount by which FASB's new approach would reduce GM's shareholder equity. As of the end of 2004, GM's equity was $27.7 billion, so this approach would have slashed the equity as of that point to $3.2 billion. As of GM's latest balance sheet, on Sept. 30, equity had dropped even lower, to $22.4 billion, so it is possible that the new accounting might send GM's equity into the red....

While the numbers at issue are huge for GM, the company is far from alone: Mr. Zion says the companies in the Standard & Poor's 500-stock index carried a combined $99 billion net pension asset in 2004, even though their plans were underfunded by $165 billion. That is a $264 billion disconnect that FASB's likely new approach would address.