Accounting & Tax

GE Snagged by Derivatives Accounting

Discloses $343 million restatement in connection with accounting for its commercial paper hedging program under SFAS 133.
Stephen TaubJanuary 19, 2007

General Electric has disclosed that it will restate its results for the five years ending in 2005 as well as its quarterly reports for the first three periods of 2006. The company will adjust its accounting for interest-rate swaps used to fix certain otherwise variable-interest costs in a portion of its financial-services commercial paper program.

The restatement will reduce earnings by a total of $343 million. Earnings will be cut for 2001 and 2002 and increased for 2003, 2004, and 2005.

GE elaborated that the decision to restate followed discussions with its auditors, KPMG, and with the Securities and Exchange Commission’s Office of the Chief Accountant. GE and KPMG had concluded that the company’s accounting for its commercial paper hedging program satisfied the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The SEC — which had been looking into GE’s accounting for derivatives since a similar restatement in 2005 — disagreed.

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“Our commercial paper hedge positions were consistent with our risk management policies and economic objectives,” said senior vice president and chief financial officer Keith Sherin in a statement. “While we are disappointed that our program did not meet the technical requirements of SFAS 133, we are committed to the highest standards of controllership and transparency and ensuring appropriate application of SFAS 133. We have corrected our commercial paper hedge policies and documentation, and related internal controls, as of January 1, 2007.”

GE is far from the first company to run afoul of the derivatives accounting standard. Companies forced to restate due to SFAS 133 in 2006 included Ford, First Data, and Bank of America.