Accounting & Tax

BofA Restates Due to Hedge Accounting

Bank is tripped up while taking the ''shortcut'' method for derivatives used as hedges under FAS 133.
Dave CookFebruary 22, 2006

Bank of America Corp. announced that it will restate its financials dating from 2002 to correct its accounting for certain derivative transactions.

The Charlotte, North Carolina-based bank holding company, second only to Citigroup Inc. in size, stated that the cumulative impact on net income will increase earnings by $345 million. As of last December 31, BofA will adjust shareholders’ equity upward by $308 million, or less than 1 percent of total equity.

In a statement, the bank disclosed that it had “certain weaknesses in internal controls relating to hedge accounting” and that it had remedied them. “The interpretations of how to apply [FAS 133, Accounting for Derivative Instruments and Hedging Activities], a quite complex standard, continue to evolve,” said chief financial officer Alvaro de Molina.

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Specifically, Bank of America stated that it had reviewed its accounting treatment for “all derivative transactions used as hedges principally against changes in interest rates and foreign currency values.” It noted that a regulatory interpretation, issued in the fourth quarter of 2005, set strict requirements for the “shortcut” method for derivatives used as hedges under FAS 133. When those criteria are not met — as was the case for certain BofA transactions, the bank determined — then companies must use the “long haul” method, “which requires extensive documentation, analysis, and testing at inception and during the life of the hedge.

BofA also stated that it has discussed the matter with its auditor, PricewaterhouseCoopers, and with regulators.

The AAO Weblog observed that since last October, the FAS 133 “shortcut” has similarly tripped up South Financial Group, Provident Bankshares, Pulaski Financial, Taylor Capital Corporation, CIT Group, First Bancorp, and Colonial BancGroup.