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The lender has terminated its compound derivatives and replaced them each with a pair of stand-alone swaps.
Stephen Taub, CFO.com | US
December 15, 2005
CIT Group Inc. disclosed that it will restate its 2005 financials after learning that it did not qualify for hedge accounting.
The commercial and consumer lender — which uses compound derivatives to hedge interest rates and currency-exchange rates related to its debt financing — stated that during the fourth quarter, it learned of a different interpretation under FAS 133, Accounting for Derivative Instruments and Hedging Activities.
CIT, whose market cap exceeds $10 billion, stated that the revisions would boost earnings per share for the first quarter by 8.2 percent and for the second quarter by 12.6 percent, and would lower third-quarter earnings per share by 3.8 percent.
In the fourth quarter, the company terminated its compound derivatives and replaced them each with a pair of stand-alone swaps — a cross-currency swap and an interest-rate swap — that achieve the same economics as the original derivatives and that qualify as hedges under FAS 133.
FAS 133, which took effect in 2000, requires companies to include their derivatives on balance sheets and adjust their earnings to reflect changes in market value.