Accounting for Faulty Ignition Switches at General Motors Company

Description

On January 31, 2014, the chief executive officer (CEO) of General Motors (GM), a major automaker located in Detroit, Michigan, must decide whether to issue a recall based on a defect that had been found through an internal safety committee investigation. The ignition switch of certain GM small car models manufactured between 2005 and 2007 was prone to being nudged out of the run position, causing the driver to lose control as the engine would switch off mid-drive, disabling power steering and preventing air bags from being deployed in the case of a collision. If she decided to issue a recall, the CEO needed to consider which car models to include, as well as whether to offer any additional compensation to drivers. Not only would a recall have potential legal and public relations repercussions, but it would present the company with potential future costs. She needed to consider the accounting implications of these contingencies.

Learning Objective

The case is suitable for an intermediate or advanced financial accounting course at an undergraduate or graduate level. Its objectives are the following: ·To teach the mechanics of accounting for contingencies in the context of a complex quality issue. ·To focus on the accounting implications of a recall decision, in particular, the timing and amount of a loss contingency accrual based on U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). ·To determine an appropriate response based on reports confirming that a defect exists and to consider the costs of a recall relative to the impact on brand equity and consumer loyalty.

Keywords

Loss contingencies Provisions recall United States US GAAP