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A company review unearths mistakes in derivatives accounting and spawns a switch to mark-to-market reporting.
Stephen Taub, CFO.com | US
May 26, 2006
Bank of America Corp. will restate financial reports dating back to 2001 as a result of missteps in its accounting treatment for derivative deals.
Some of the bank's revisions will cut earnings for 2003, 2004, and 2005 by 0.5 percent, 1.4 percent, and 2.5 percent, respectively, the company stated in an 8-K filing. The others will boost earnings by 3.3 percent in 2002 and 10.4 percent in 2001.
The financial-services giant conceded that "certain hedges did not meet the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities."
The company said it uses interest and foreign-exchange derivatives to curb earnings volatility, and claimed it had applied hedge accounting for a number of the deals it believes met the requirements of the Financial Accounting Standard Board's derivatives standard.
Prompted by a recent interpretation of the "shortcut" method for derivative instruments under SFAS 133, the bank launched a review of all of its hedge-accounting transactions that were completed in the first quarter of 2006. (The bank did not name the source of the interpretation.)
Under the shortcut method, companies meeting certain strict criteria can avoid ongoing effectiveness testing of derivatives transactions. If those criteria aren't met, companies must use the "long haul" method, which requires extensive documentation, analysis, and testing at the start of the hedge and during its entire life.
In their review of the bank's hedge deals, officials found that some didn't comply with SFAS 133. Since Bank of America couldn't apply hedge accounting for those transactions, it marked them to market on its income statement and entered no related offset for hedge accounting. Thus, changes in interest rates and currency rates that affect the fair value of derivatives "have had a direct impact on our Net Income," the bank stated.