General Motors 2011 Annual Report Download - page 93

GENERAL MOTORS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Policy, Warranty and Recall Campaigns
The estimated costs related to policy and product warranties are accrued at the time products are sold and are charged to
Automotive cost of sales. These estimates are established using historical information on the nature, frequency and average cost of
claims of each vehicle line or each model year of the vehicle line and assumptions about future activity and events. Revisions are
made when necessary, based on changes in these factors. Trends of claims are actively studied and actions are taken to improve
vehicle quality and minimize claims.
The estimated costs related to product recalls based on a formal campaign soliciting return of that product are accrued when they
are deemed to be probable and can be reasonably estimated.
Income Taxes
The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using the
statutory tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. We
establish and Old GM established valuation allowances for deferred tax assets based on a more likely than not standard. The ability to
realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods
provided for in the tax law for each applicable tax jurisdiction. We consider and Old GM considered the following possible sources of
taxable income when assessing the realization of deferred tax assets:
• Future reversals of existing taxable temporary differences;
• Future taxable income exclusive of reversing temporary differences and carryforwards;
• Taxable income in prior carryback years; and
• Tax-planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and
negative evidence factors, including but not limited to:
• Nature, frequency, and severity of recent losses;
• Duration of statutory carryforward periods;
• Historical experience with tax attributes expiring unused; and
• Near- and medium-term financial outlook;
It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence,
such as cumulative losses in recent years. We utilize and Old GM utilized a rolling three years of actual and current year anticipated
results as the primary measure of cumulative losses in recent years.
Income tax expense (benefit) for the year is allocated between continuing operations and other categories of income such as
Discontinued operations or Other comprehensive income (loss). In periods in which there is a pre-tax loss from continuing operations
and pre-tax income in another income category, the tax benefit allocated to continuing operations is determined by taking into account
the pre-tax income of other categories.
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