Accounting & Tax

Farmer Mac to Restate Over SFAS 133

The government-sponsored lender will fix several of its past statements after deciding to nix hedge accounting.
Stephen TaubOctober 10, 2006

The Federal Agricultural Mortgage Corporation (Farmer Mac) will restate three years’ worth of financial statements. The company, chartered by Congress to establish a secondary market for agricultural real estate and rural housing mortgage loans, said it is correcting its accounting for derivatives transactions. Specifically, the lender will no longer apply hedge accounting to derivatives it uses to manage interest rate risk.

Instead, Farmer Mac will show fluctuations in the fair value of its derivatives in operations statements, rather than deferring or offsetting them, it said in a press release. This affects the statements made in 2003, 2004, 2005, and the first two quarters of 2006.

Because those derivatives transactions effectively hedged the economic risks of the underlying assets and liabilities, the accounting corrections under SFAS 133 will have an “insignificant impact” on Farmer Mac’s financial position, stockholder’s equity, cash flows, and business model, the company said. It also does not expect the restatements to have a significant effect on its overall capital adequacy or its ability to carry out its business development plans.

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“Interpretations of the proper application of SFAS 133, a complex accounting standard, continue to evolve,” Nancy Corsiglia, Farmer Mac’s CFO noted in the statement. She pointed out that the company’s assessment of accounting interpretations, as well as industry practices, led to the internal accounting review which, in turn, led to the restatements. “Of course, our risk management will continue to include the use of derivatives,” Corsiglia added.

Farmer Mac warned that discontinuing its use of the hedge accounting provisions of SFAS 133 for future derivative transactions could result in “significant percentage fluctuations” in future GAAP net income.