Accounting & Tax

GE to Restate, Faces Informal Probe

The company's accounting for derivatives fell afoul of FAS 133.
Stephen TaubMay 9, 2005

General Electric Co. announced that it will restate its financial results dating back to 2001 due to its accounting for derivatives. The revision will result in a non-cash earnings increase of $381 million from 2001 through the first quarter of 2005, less than 0.6 percent of GE’s earnings over this period.

The conglomerate stated that during a regular audit review, it concluded that its accounting for certain transactions used to protect its financial services businesses from changes in interest and currency exchange rates do not technically comply with accounting rules. The guidelines in questions — found in Financial Accounting Standard 133, Accounting for Derivative Instruments and Hedging Activities — require companies to include their derivatives on balance sheets and adjust their earnings to reflect changes in market value. (The Financial Accounting Standards Board may revisit FAS 133 this summer.)

GE implemented FAS 133 in 2001, “and our technical accountants and KPMG reviewed that implementation,” said senior vice president and chief financial officer Keith Sherin, in a statement. But it’s clear, he added that “some of our derivatives do not qualify for hedge accounting.”

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The result of not using hedge accounting proved to be immaterial on an annual basis but material on a quarterly basis, so the company decided to restate results, said Sherin, adding that “there is no effect economically as the company’s match funding objectives were met, and there has been no effect on cash flows.”

The company also announced that the Securities and Exchange Commission has launched an informal investigation of GE and its General Electric Capital Services unit regarding the accounting issues related to the restatement.

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