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W14437

ACCOUNTING FOR FAULTY IGNITION SWITCHES AT GENERAL

MOTORS COMPANY 1

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Julia Cutt wrote this case under the supervision of Professor Darren Henderson solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.

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This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-09-11

Mary Barra, chief executive officer (CEO) of General Motors Company (GM), sat in her Detroit, Michigan
office looking out the window. It was January 31, 2014, and Barra had a tough decision to make. She had
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just received the findings of an internal safety committee investigation launched in December 2013. The
investigation had revealed that certain GM small car models had a severe ignition switch defect. 2 Chevrolet
Cobalts and Pontiac G5s manufactured between 2005 and 2007 were prone to being nudged out of the
“run” position, causing drivers to lose control of their vehicles. This information had prompted Barra to
consider the option of a recall. If she decided to do so, she would have to consider which car models to
include, as well as whether to offer any additional compensation to drivers. Furthermore, she needed to
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consider how a recall would impact GM’s susceptibility to lawsuits from both consumers and investors. A
recall also presented GM with potential future costs, and Barra needed to consider the accounting
implications of these contingencies. Knowing the media was bound to learn about the results of the safety
committee investigation, she had to make her decision about a recall quickly.

3
COMPANY BACKGROUND
No

GM was founded in 1908 by William Durrant, a leading manufacturer of horse-drawn vehicles. Within a
few years, the automaker had acquired more than 20 companies, including Buick, Oldsmobile and
Cadillac. In the late 1920s, as demand for automobiles soared, GM was credited with innovations in
production, design and marketing.

GM played an important role in both world wars. During World War I it was the largest supplier of goods
to the Allied forces, and over the course of World War II it delivered more than $12 billion 4 worth of
airplanes, trucks and tanks.
Do

In 1974, GM introduced the catalytic converter, groundbreaking technology that significantly reduced fuel
emissions, changing the entire automobile industry. Eventually, the seemingly untouchable manufacturer
faced a threat to its continued dominance in the United States. The arrival of foreign imports put pressure
on GM to adapt to a changing market. As oil prices soared, U.S. consumers welcomed the smaller, more
fuel efficient cars manufactured by Japanese automakers. In the 1980s, as foreign-made vehicles flooded

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the U.S. market, trade policy became a contentious issue for U.S. automakers who complained that they
were not being given equal access to foreign markets.

Throughout the 2000s, GM expanded globally, while focusing on innovations in fuel efficiency and
emissions reduction. While GM saw success in foreign markets, it continued to lose market share at home.
The automaker posted a loss of $39 billion in 2007, the biggest loss in the history of the auto industry. 5

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Too Big To Fail

GM had been financially vulnerable well before the 2008 recession hit. Over the years, in an effort to
appease autoworkers’ unions, the company had agreed to contracts that provided its employees with
lifetime benefits. 6 In the 1990s, amid a recession and volatile stock price fluctuations, GM narrowly

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avoided a benefit fund crisis by enacting a broad restructuring plan. 7 More than a decade later, the
automaker faced the same crisis, this time amplified by declining sales. GM simply could not afford to
meet its labour cost obligations. Fearful of bankruptcy, the company proposed a merger first to Ford Motor
Company (Ford) and then to Chrysler. 8 Both proposals were rejected.

In 2008, after GM had been declined government financial aid, the Bush administration issued a “bridge
loan,” 9 stipulating that a revised business plan must be provided before any other funding would be
considered. 10 A year later, President Barack Obama once again denied GM government aid and instead
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recommended Chapter 11 bankruptcy. 11

On June 1, 2009, GM filed for Chapter 11 bankruptcy. Under this chapter of the U.S. Bankruptcy Code,
the company was allowed to reorganize but not forced to shut down or liquidate its assets. 12 The company
emerged from court protection on July 10, 2009 as the “new” GM. The U.S. government held 60 per cent
of the new GM’s stock, the Canadian government 12 per cent and the United Auto Workers union just over
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17 per cent. 13 This new GM had dropped $48 billion of debt and health care obligations, reduced its
dealership operations by 40 per cent and shed struggling brands such as Saab and Saturn. 14 This company
was separate and independent from the old corporation, leaving its liabilities behind.15

In November 2010, GM once again became a public company, with an initial public offering of $20.1
billion. 16 In fiscal 2013, GM recorded $152 billion of revenue, with a net profit of $5.3 billion.17 GM’s
financial statements for 2009 to 2013 are shown in Exhibit 1.
No

18
FAULTY IGNITION SWITCHES

A vehicle’s ignition switch served a variety of purposes. It controlled the power supply to a car’s
accessories and connected the starter to the battery. Most ignition switches had four positions: off,
accessories, run and start. When a key was in the accessories position, certain accessories that required too
much battery power were disabled. These high-power accessories often included power windows, air bags
and power steering, depending on the model of car. 19
Do

As early as 2001, GM engineers were aware of a defect with the ignition switch in its Saturn Ion model.
Pre-production testing had revealed that the switch could be nudged out of the run position, cutting power
to the car’s engine. In 2003, a GM technician submitted a report of a Saturn Ion stalling while being
driven. The report suggested that the weight of extra keys on the driver’s key chain seemed to have worn
out the ignition switch.

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In May 2005, after several consumer reports of both Saturn Ions and Chevrolet Cobalts abruptly losing
power, GM engineers proposed a design change be made to the ignition switch. 20 This design revision was
originally approved, but then later cancelled after being deemed too costly. A year later, Delphi
Automotive, GM’s ignition switch manufacturer, proposed its own ignition switch design change. This
revision was signed-off on, but the model number for the ignition switch remained unchanged. While the
redesigned ignition switch went into production and was installed in new cars starting in 2007, many GM

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employees were unaware of the design change.

In 2007, GM received reports of collisions involving Chevrolet Cobalts where air bags had failed to
deploy. In almost half of these reported accidents, the vehicle’s ignition was not in the run position. GM
also started to receive reports of similar accidents involving Pontiac G5s.

In August 2011, GM initiated an internal investigation into all reported head-on collisions involving

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Cobalts and G5s in which air bags did not deploy. 21 Ignition switches were removed from the vehicles in
question and tested. A year later, findings from the internal report revealed that all crashes in which
ignition switches had been nudged out of the run position had involved vehicle models from 2007 and
earlier. In late December 2013, a GM safety committee review confirmed that the ignition switches in
certain GM models produced after 2007 were less prone to being nudged.22 It was concluded that a design
change had been made to the ignition switch sometime in 2006.

The “faulty” ignition switches in GM’s small car models manufactured prior to 2007 caused a vehicle’s
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engine to switch off mid-drive, disabling power steering and preventing air bags from being deployed in
the case of a collision. The switch detent plunger, designed to keep the ignition from being nudged out of
place, did not provide enough torque to do so. By January 31, 2014, GM’s safety committee review had
confirmed that 31 crashes and 13 deaths were linked to defective ignition switches.23
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THE RECALL DECISION

Clearly, defective ignition switches were a safety concern that GM needed to address. Barra was tasked
with deciding whether the issue justified a recall. A vehicle’s ignition switch had to be nudged or jostled to
actually disengage from the run position. GM engineers had found that drivers with heavy key chains or
those who sat with their knees too close to the steering wheel were more likely to accidently nudge their
ignition switches. 24 Instead of announcing a recall, GM could issue a safety warning, instructing drivers of
No

affected vehicles to drive with only a single key on their key ring and to avoid brushing up against their
car’s ignition. This option was significantly less costly than a recall, but Barra worried about the lawsuits
GM would inevitably face if a recall was avoided and accidents continued to occur.

If Barra opted to go ahead with a recall, she had to decide how extensive it would be. While issues with
ignition switches had been identified in Saturn Ion, Chevrolet Cobalt and Pontiac G5 models, GM
engineers had only confirmed a defect in the Cobalt and G5 models manufactured between 2005 and
2007. 25 This included approximately 800,000 vehicles. 26 It was possible, however, that the defect was
present in a wider variety of models. A separate safety review would have to be conducted to confirm the
Do

presence of the ignition switch defect in other small car models. If a safety review revealed that the defect
was present in Saturn Ion, Chevrolet HHR and Pontiac Solstice models, the recall would expand to include
closer to 1.4 million vehicles. 27 Historically, in automobile recalls due to safety concerns, approximately
two-thirds of affected consumers brought their vehicles in to be repaired.28 Of course, the severity of a
defect’s consequences affected the rate of consumer compliance. For example, Toyota’s gas pedal recall in
2010, which involved a defect that caused gas pedals to stick and vehicles to accelerate unintentionally,

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reached an 88 per cent repair rate. In contrast, Hyundai’s suspension recall in 2011, which involved
steering issues, saw a repair rate of only 39 per cent. 29

The actual cost to repair the ignition switch defect was estimated to be $600 per vehicle, including parts
and labour. 30 If a recall was issued, GM was legally responsible for covering the entire repair cost for each
affected vehicle.31

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Other Potential Costs

Along with the repair costs of the recall, Barra had to consider the cost of any additional compensation that
might be offered to consumers. When a recall was announced, affected drivers often worried about the
safety of their vehicles. In some cases, manufacturers issued nervous drivers rental cars to be used until

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dealers had received repair parts. It often took one to two months from the date of a recall notice for repair
parts to be manufactured and shipped to dealers. The cost to a dealer for a rental car was between $30 and
$55 per day. 32 Additionally, a safety recall also prompted some drivers to want to get rid of their recalled
vehicles. In an attempt to maintain brand equity, some automakers offered to buy back vehicles affected by
a recall, as long as consumers then purchased a new car from within their brands of vehicles. Sometimes,
competitors even offered similar cash allowances to incentivize drivers to switch dealers. In 2010, amid
Toyota’s gas pedal recall, GM offered Toyota owners $1,000 towards the purchase of a new GM vehicle. 33
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Barra had to ensure that a recall was handled tactfully in order to limit GM’s exposure to litigation risk.
Historically, class action lawsuits for personal injury claims were heavily publicized and drawn out in the
courts. Toyota settled a class action lawsuit related to its 2010 gas pedal recall for $1.6 billion and faced an
additional $200 million in legal fees. 34 If GM’s stock price took a hit after the recall was announced,
shareholders could attempt to sue the company for securities fraud. In 2012, Toyota agreed to pay $25.5
million to settle a class action lawsuit brought against it by its shareholders, who accused the automaker of
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failing to disclose safety and quality issues in a timely manner.35

In addition to the threat of lawsuits, the National Highway Traffic Safety Administration, an agency of the
U.S. Department of Transportation, often performed its own investigations on recalled vehicles. If it was
determined that GM failed to recall its vehicles in a timely manner, the company faced a fine of up to $35
million. 36 Both Ford and Toyota had been forced to pay this fine in the past.
No

As she weighed the pros and cons of announcing a recall, Barra also had to consider the effect the decision
might have on GM’s reputation and future financial performance. GM’s brand equity 37 was estimated to be
worth $4.3 billion in 2013. 38 The negative publicity of a large-scale recall threatened to damage the
company’s reputation and erode consumer loyalty. With average vehicle costs well over $30,000 and a
typical ownership cycle of at least five years, customer loyalty was especially important in the automobile
industry. GM had a repeat buyer percentage of 47.6 per cent, but any damage to the automaker’s brand
threatened future sales.39 GM’s forecasted sales growth in 2014 would likely be stunted if the recall earned
enough negative attention. Alternatively, if Barra opted not to issue a recall, GM’s brand equity could also
suffer. Consumers could perceive this non-action as an indicator of a lack of responsibility or a disregard
Do

for customer safety.

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ACCOUNTING FOR THE LOSS CONTINGENCY

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If Barra initiated a recall on cars with defective ignition switches, the decision would undoubtedly have an
impact on GM’s future costs. In the case of a recall, Barra had to work with her accounting team to
determine whether a charge for future losses needed to be included in the current financial statements.
Under U.S. Generally Accepted Accounting Principles (GAAP), Statement of Financial Accounting

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Standard No. 5 (SFAS 5), Accounting for Contingencies, 40 required that a charge be recognized if a firm
faced a future loss that stemmed from past events and was both probable and estimable. See Exhibit 2 for
excerpts from SFAS 5. If it was determined that the recall costs were not estimable, GM was still required
to disclose a discussion of the recall and its potential for financial impact within the notes to its financial
statements. Determining whether a liability existed, and to what extent, required significant managerial
judgement on Barra’s part. Similar accounting rules to SFAS 5 applied under International Accounting
Standard No. 37 (IAS 37), Provisions, Contingent Liabilities and Contingent Assets, but some differences

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existed. See Exhibit 3 for a summary of the differences between SFAS 5 and IAS 37. As a global company
with numerous subsidiaries operating in countries that had adopted International Financial Reporting
Standards (IFRS), GM needed to consider the accounting guidelines of both U.S. GAAP and IFRS.

CONCLUSION

Barra turned from her window to face her desk. She had a lot of work to do. First, she needed to decide
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whether or not to launch a recall on vehicles with faulty ignition switches. If she opted to move forward
with a recall, she then had to decide which car models to include and what additional compensation, if any,
to offer to consumers. Furthermore, Barra knew her accounting team needed to consider the impact a recall
would have on her firm’s financial statements. How would GM’s financial position and operating
performance be affected? Would a loss contingency need to be included in the company’s financial
statements? If so, what contingency should be recognized? Barra opened her laptop and took a sip of
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coffee. She had some tough decisions to make.

The Ivey Business School gratefully acknowledges the generous support of the CPA-Ivey Centre for
Accounting Education in the development of this case.
No
Do

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EXHIBIT 1: GENERAL MOTORS CONSOLIDATED INCOME STATEMENTS

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(in millions of US$, except for per share amounts)

Years Ended December 31

2013 2012 2011 2010 2009*
Net sales and revenues

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Automotive 152,092 150,295 148,866 135,311 57,474
GM Financial 3,335 1,961 1,410 281 -
Total 155,427 152,256 150,276 135,592 57,474

Costs and expenses

Automotive costs of sales 134,925 140,236 130,386 118,768 56,316

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GM Financial operating and other expenses 2,448 1,207 785 152 -
Automotive selling, general and administrative expense 12,382 14,031 12,163 11,564 6,021
Goodwill impairment charges 541 27,145 1,286 - -
Total costs and expenses 150,296 182,619 144,620 130,484 62,337

Automotive interest expense 334 489 540 1,098 694

Interest income and other non-operating income, net 1,063 845 851 1,531 375
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Gain (loss) on extinguishment of debt (212) (250) 18 196 (101)
Equity income and gain on investments 1,810 1,562 3,192 1,438 497
Income (loss) before income taxes 7,458 (28,695) 9,177 7,175 (4,786)
Income tax expense (benefit) 2,127 (34,831) (110) 672 (1,000)
Net income 5,331 6,136 9,287 6,503 (3,786)
Other comprehensive income (loss), net of tax
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Foreign currency translation adjustments (733) (103) (183) 223 157

Cash flow hedging gains (losses), net (2) 25 (22) (1)
Unrealized gains (losses) on securities, net (39) 45 1 (7) 2
Defined benefits plans, net 5,693 (2,120) (6,958) (545) 1,430
Other comprehensive income (loss), net of tax 4,921 (2,180) (7,115) (351) 1,588
Comprehensive income 10,252 3,956 2,172 6,152 (2,198)
Comprehensive (income) loss attributable to
No

33 41 (87) (13) (33)

noncontrolling interests
Comprehensive income attributable to stockholders 10,285 3,997 2,085 6,139 (2,231)

Earnings per share

Basic
Basic earnings per common share $ 2.71 $ 3.10 $ 4.94 $ 3.11 $ (3.58)
Weighted-average common shares outstanding 1,393 1,566 1,536 1,500 1,238
Diluted
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Diluted earnings per common share $ 2.38 $ 2.92 $ 4.58 $ 2.89 $ (3.58)
Weighted-average common shares outstanding 1,676 1,675 1,668 1,624 1,238

*July 10, 2009 through December 31, 2009.

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EXHIBIT 1 (CONTINUED): GENERAL MOTORS CONSOLIDATED BALANCE SHEETS

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(in millions of US$, except for per share amounts)

As At December 31
2013 2012 2011 2010 2009*
ASSETS

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Current assets
Cash and marketable securities 30,240 28,096 31,853 27,856 36,730
Accounts and notes receivable 22,813 14,439 9,949 8,699 7,518
Inventories 14,039 14,714 14,324 12,125 10,107
Equipment on operating leases, net 2,398 1,782 2,464 2,568 2,727
Deferred income taxes 10,349 9,429 1,657 1,805 1,777
Other current assets 1,662 1,536 - - 388

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Total current assets 81,501 69,996 60,247 53,053 59,247
Non-current assets
Restricted cash and marketable securities 829 682 2,027 2,250 1,489
GM Financial receivables, net 14,354 6,954 9,162 8,197 -
Equity in net assets of nonconsolidated affiliates 8,094 6,883 6,790 8,529 7,936
Property, net 25,867 24,196 22,957 19,235 18,687
Goodwill 1,560 1,973 29,019 31,778 30,672
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Intangible assets 5,668 6,809 10,013 11,882 14,547
Deferred income taxes 22,736 27,922 2,900 3,594 564
Other assets 5,735 4,007 1,488 380 3,153
Total non-current assets 84,843 79,426 84,356 85,845 77,048
Total assets 166,344 149,422 144,603 138,898 136,295
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LIABILITIES AND EQUITY

Accounts payable 23,621 25,166 31,432 27,625 18,725
Short-term debt and current portion of long-term debt 14,158 5,518 2,781 2,448 11,067
Accrued liabilities 24,633 23,308 22,756 24,044 22,643
Long-term debt 22,025 10,532 3,613 3,014 5,562
Post-retirement pensions and benefits 25,380 34,729 31,911 31,188 35,794
Other liabilities and deferred income taxes 13,353 13,169 13,119 13,420 13,549
No

Total liabilities 123,170 112,422 105,612 101,739 107,340

Equities
Preferred stock, $0.01 par value 3,109 10,391 10,391 10,391 6,998
Common stock, $0.01 par value 15 14 16 15 5
Additional paid-in capital 28,780 23,834 26,391 24,257 24,050
Retained earnings 13,816 10,057 7,183 266 (4,394)
Accumulated other comprehensive loss (3,113) (8,052) (5,861) 1,251 1,588
Non-controlling interests 567 756 871 979 708
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Total equity 43,174 37,000 38,991 37,159 28,955

Total liabilities and equity 166,344 149,422 144,603 138,898 136,295

*July 10, 2009 through December 31, 2009.

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EXHIBIT 1 (CONTINUED): GENERAL MOTORS CONSOLIDATED STATEMENTS OF CASH FLOWS

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(in millions of US$)

Years Ended December 31

2013 2012 2011 2010 2009*
Cash flows from operating activities

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Net income 5,331 6,136 9,287 6,589 (3,786)
Depreciation and amortization expense 8,041 38,762 7,427 6,923 4,511
Foreign currency remeasurement and transaction losses 350 117 55 209 755
Amortization of discount and issuance costs on debt 114 188 160 163 140
Undistributed earnings of nonconsolidated affiliates (92) (179) (1,947) (753) (497)
Pension contributions and OPEB payments (1,458) (3,759) (2,269) (5,723) (5,832)
Pension and OPEB (income) expense, net 638 3,232 (755) 412 3,570

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(Gains) losses on extinguishment of debt 212 250 (18) (196) 101
Provision (benefit) for deferred taxes 1,561 (35,561) (318) 242 (1,427)
Change in other operating assets and liabilities (1,326) 630 (4,122) (1,118) 3,664
Other operating activities (741) 789 666 32 (135)
Net cash flows from operating activities 12,630 10,605 8,166 6,780 1,064
Cash flows from investing activities
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Expenditures for property (7,565) (8,068) (6,249) (4,200) (1,862)
Marketable securities, acquisitions, liquidations (30,468) 978 (14,294) 7,536 5,184
Acquisition of companies, net of cash acquired (2,623) (44) (53) (3,042) (2,127)
Proceeds from sale of business units, net of cash disposed 896 18 4,821 380 222
Purchases and proceeds from sales of leased vehicles, net (2,037) (991) (790) (11) -
Other investing activities 27,435 4,602 3,825 570 739
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Net cash flows from investing activities (14,362) (3,505) (12,740) 1,233 2,156
Cash flows from financing activities
Net cash flows from financing activities 3,731 (4,741) (358) (9,770) 345
Effect of exchange rate changes on cash and equivalents (400) (8) (253) 334 101
Net increase (decrease) in cash and equivalents 1,599 2,351 (5,185) (1,423) 3,666
Cash and equivalents at beginning of period 18,422 16,071 21,256 22,679 19,013
Cash and equivalents at end of period 20,021 18,422 16,071 21,256 22,679
No

Significant non-cash activity

Non-cash property additions 3,224 3,879 3,689 - -
Contribution of common stocks to pension plans - - 1,864 - -
Notes issued to settle CAW retiree healthcare plan - - 1,122 - 1
Mandatory conversion of Series B Preferred Stock to
Common Stock 4,854 - - 4,855 -

*July 10, 2009 through December 31, 2009

Do

Source: Chart created by case writers with data from: “General Motors Company 10-Ks,” www.sec.gov/cgi-bin/browse-
edgar?action=getcompany&CIK=0001467858&type=10-K&dateb=&owner=exclude&count=40, accessed July 16, 2014.

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EXHIBIT 2: EXCERPTS FROM STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.5,

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ACCOUNTING FOR CONTINGENCIES

“A contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty

as to possible gain . . . or loss . . . to an enterprise that will ultimately be resolved when one or more

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future events occur or fail to occur.”

“When a loss contingency exists, the likelihood that the future event or events will confirm the loss or
impairment of an asset or the incurrence of a liability can range from probable to remote . . .

a. Probable. The future event or events are likely to occur.

b. Reasonably possible. The chance of the future event or events occurring is more than remote but less

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than likely.

c. Remote. The chance of the future event or events occurring is slight.”

“An estimated loss from a loss contingency . . . shall be accrued by a change to income if both of the
following conditions are met:

a. Information available prior to issuance of the financial statements indicates that it is probable that an
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asset had been impaired or a liability had been incurred at the date of the financial statements . . .

b. The amount of the loss can be reasonably estimated.”

“If no accrual is made for a loss contingency because one or both of the conditions . . . are not met, or if
an exposure to loss exists in excess of the amount accrued . . . disclosure of the contingency shall be
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made when there is at least a reasonable possibility that a loss or an additional loss may have been
incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the
possible loss or range of loss or state that such estimate cannot be made.”
Source: “Statement of Financial Accounting Standards No.5; Accounting for Contingencies,” Financial Accounting Standards
Board, March 1975, accessed June 16, 2014.
No
Do

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EXHIBIT 3: ACCOUNTING FOR CONTINGENCIES — COMPARING U.S. GAAP AND IFRS

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U.S. GAAP (SFAS 5) IFRS (IAS 37)
Recognition threshold A loss must be ‘probable’ to be A loss must be ‘probable’ to be
recognized, where probable is recognized, where probable is

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interpreted as being high in
likelihood, i.e., 70% or more.
Discounting provisions If the amount of a liability and the
timing of payments are fixed or
reliably determinable, or if the
obligation is a fair value
obligation, provisions may be
discounted. The discount rate
interpreted as more likely than
not, i.e., greater than 50%.
Taking into consideration the
time value of money, provisions
should be recorded at the
estimated amount to settle or
transfer the obligation. The
discount rate used should be a

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used will depend on the nature of
the provision. When a provision
is measured at fair value, the
time value of money and specific
risks related to the liability should
be considered.
Range of possible outcomes The most likely outcome within
the range of outcomes should be
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accrued. If no one outcome is
more likely than the others, then
the minimum amount in the
range of the outcomes should be
accrued.
Restructuring costs Once management has
committed to a detailed exit plan,
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pre-tax rate that reflects current
market assessments of the time
value of money and specific risks
related to a liability.
The best estimate of obligation
should be accrued. The best
estimate can either be the
expected value or midpoint of the
range of outcomes.
Once management has
demonstrably committed to a

each type of cost is examined to detailed exit plan the general

determine when it should be provisions of IAS 37 apply. Costs
recognized. Some costs are are typically recognized earlier
recognized immediately, while than under U.S. GAAP because
others are expensed when IAS 37 focuses on the plan as a
incurred. whole, not its individual
components.
Similarities
No

Both U.S. GAAP and IFRS require recognition of a loss based on the probability or occurrence. Both
accounting standards also prohibit the recognition of provisions for costs associated with future operating
activities. As well, both U.S. GAAP and IFRS require that a contingent liability whose likelihood to occur is
more than remote, but does not meet recognition criteria, still be disclosed.

Source: Chart created by case writers with data from: “US GAAP versus IFRS, The Basics,” November 2012,
www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_T
he_Basics_Nov2012.pdf, accessed July 17, 2014.
Do

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ENDNOTES

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1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives in
this case are not necessarily those of General Motors or any of its employees.
2
“GM’s Ignition Switch Safety Recall,” www.chevroletproblems.com/problems/ignition-switch-recall.shtml, accessed August
6, 2014.
3
“Company: History & Heritage,” www.gm.com/company/historyAndHeritagehtml, accessed July 8, 2014.
4

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All dollar values are stated in U.S. dollars unless specified otherwise.
5
Marc Davis, “How The U.S. Automobile Industry Has Changed,” www.investopedia.com/articles/pf/12/auto-industry.asp,
accessed August 7, 2014.
6
“Why General Motors Went Bankrupt,” June 2009, http://business.rediff.com/slide-show/2009/jun/01/slide-show-1-why-
general-motors-went-bankrupt.htm#3, accessed August 7, 2014.
7
Allan Sloan, “GM's High Performance Pension Machine,” April 2007, www.washingtonpost.com/wp-
dyn/content/article/2007/04/09/AR2007040901262.html, accessed August 7, 2014.
8
Bill Vlasic, “G.M. Said to Seek Merger with Ford Before Chrysler,” October 2008,
www.nytimes.com/2008/10/12/business/12auto.html?_r=1&adxnnl=1&adxnnlx=1407434800-Lj7nTwii/S07ChVAvs3V+w,
accessed August 7, 2014.

yo
9
A bridge loan is a short-term loan that is used until a person or company secures permanent financing.
10
David Sanger, David Herszenhorn and Bill Vlasic, “Bush Aids Detroit, But Hard Choices Wait for Obama,” September
2009, www.nytimes.com/2008/12/20/business/20auto.html?pagewanted=all&_r=0, accessed July 8, 2014.
11
Andrew Clark, “Obama Threatens US Car Industry with Bankruptcy,” March 2009,
www.theguardian.com/business/2009/mar/30/obama-threatens-bankruptcy-us-carmakers, accessed July 8, 2014.
12
Bhavana Acharya, “GM Bankruptcy Explained,” June 2009, www.thehindubusinessline.com/todays-paper/tp-
investmentworld/gms-bankruptcy-explained/article1085483.ece, accessed July 8, 2014.
13
David Welch, “GM Files for Bankruptcy,” June 2009, www.businessweek.com/stories/2009-06-01/gm-files-for-
bankruptcybusinessweek-business-news-stock-market-and-financial-advice, accessed July 8, 2014.
op
14
Kevin Krolicki and David Bailey, “GM Exits Bankruptcy,” July 2009, www.reuters.com/article/2009/07/10/us-gm-
idUSTRE5690JO20090710, accessed July 8, 2014.
15
Paul Barrett, “GM Plays Recall Games With Its Recall Liability: Four Blunt Points,” April 2014,
www.businessweek.com/articles/2014-04-21/gm-plays-legal-games-with-its-recall-liability-four-blunt-points, accessed July 8,
2014.
16
Claire Baldwin and Soyoung Kim, “GM IPO Raises $20.1 Billion,” November 2010,
www.reuters.com/article/2010/11/17/us-gm-ipo-idUSTRE6AB43H20101117, accessed July 8, 2014.
17
“General Motors Co: Consolidated Income Statements,” February 2013, www.sec.gov/cgi-
tC

bin/viewer?action=view&cik=1467858&accession_number=0001467858-14-000043&xbrl_type=v#, accessed July 14, 2014.

18
Peter Valdes-Dapena and Tal Yellin, “GM: Steps to a Recall Nightmare,” June 2014,
http://money.cnn.com/infographic/pf/autos/gm-recall-timeline/, accessed July 9, 2014.
19
“What Is an Ignition Switch?” www.wisegeek.org/what-is-an-ignition-switch.htm, accessed July 9, 2014.
20
“GM Ignition Switch Defect,” April 2014, www.rcrsd.com/vehicle-accidents/gm-ignition-defect-recall/, accessed August 7,
2014.
21
Ibid.
22
Ibid.
23
“GM Expands Ignition Switch Recall,” February 2014, http://media.gm.ca/media/us/en/gm/news.detail.html/content/Pages/
news/us/en/2014/Feb/0225-ion.html, accessed August 7, 2014.
No

24
“GM Testing Shows Single Key Safe in Recalled Small Cars,” May 2014,
http://media.gm.com/product/public/us/en/gmignitionupdate/News.detail.html/content/Pages/news/us/en/2014/May/0508-
boyer.html, accessed July 10, 2014.
25
“GM Expands Ignition Switch Recall,” op.cit.
26
Peter Valdes-Dapena, “GM Expands Recall, Cites 13 Deaths,” February 2014,
http://money.cnn.com/2014/02/25/autos/gm-ignition-recall-expanded/, accessed July 14, 2014.
27
“GM Expands Ignition Switch Recall,” op.cit.
28
Jeff Green, “Drivers Ignoring Recall Notices Pose Hurdle for GM’s CEO,” April 2014, www.bloomberg.com/news/2014-04-
15/drivers-ignoring-recall-notices-pose-hurdle-for-gm-s-ceo.html, accessed July 14, 2014.
29
Jeff Bennett, “GM Recalls More Cars Over Ignition Switch Issues,” June 2014, http://online.wsj.com/articles/gm-recalls-
more-vehicles-because-of-ignition-switch-1402949521, accessed July 14, 2014.
Do

30
Neda Jafarzadeh, “How an Auto Recall Affects Your Car Insurance,” November 2013,
http://money.usnews.com/money/blogs/my-money/2013/11/11/how-an-auto-recall-affects-your-car-insurance, accessed July
14, 2014.
31
Jeffrey Ross, “Ford Details How It Will Fix Recalled Fire-risk 2013 Escape and Fusion Models,” December 2012,
www.autoblog.com/2012/12/11/ford-details-how-it-will-fix-recalled-fire-risk-2013-escape-and/, accessed July 14, 2014.
32
Tom Krisher, “Owners of Recalled GM Cars Face Long Repair Rates,” May 2014,
www.usatoday.com/story/money/cars/2014/05/08/gm-recall-repairs-waits/8851779/, accessed August 7, 2014.

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Permissions@hbsp.harvard.edu or 617.783.7860
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33
Michael Santo, “GM Offers Beleaguered Toyota Owners Incentives to Switch,” January 2010,
www.huliq.com/3257/90941/gm-offers-beleaguered-toyota-owners-incentives-switch, accessed July 14, 2014.
34
Jessica Dye, “Amid GM Recall, Lawyers Hit Internet, Social Media to Find Plaintiffs,” March 2014,
www.autonews.com/article/20140319/OEM11/140319820/amid-gm-recall-lawyers-hit-internet-social-media-to-find-plaintiffs,
July 14, 2014.
35
Kim Kyung-Hoon, “Toyota Agrees to $25.5 Million U.S. Investor Lawsuit Settlement,” November 2012,
www.reuters.com/article/2012/11/14/us-toyota-settlement-idUSBRE8AD06V20121114, accessed July 14, 2014.

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36
Valdes-Dapena, op.cit.
37
Here, brand equity is defined as the value a company would be willing to pay to license its brand if it did not own it.
38
“Brand Finance Auto 100 2014,” http://brandirectory.com/league_tables/table/auto-100-2014, accessed July 14, 2014.
39
Jim Gorzelany, “Cars With the \most Brand Loyal Buyers,” October 2011,
www.forbes.com/sites/jimgorzelany/2011/10/13/cars-with-the-most-brand-loyal-buyers/, accessed July 14, 2014.
40
“Statement of Financial Accounting Standards No.5; Accounting for Contingencies,” Financial Accounting Standards
Board, March 1975, accessed June 16, 2014.

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This document is authorized for educator review use only by Krishna Kumar Somasundaram, HE OTHER until Oct 2023. Copying or posting is an infringement of copyright.
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