Accounting & Tax

Dollar Thrifty Restates over FAS 133

Car-rental company concludes that because of certain prepayment clauses, its interest-rate swaps did not qualify for the ''shortcut'' method in pri...
Stephen TaubFebruary 5, 2007

Dollar Thrifty Automotive Group disclosed that it will restate its financials from fiscal year 2001 through the third quarter of fiscal 2006 to correct its accounting for certain derivative transactions.

The company added that it identified a material weakness “relating to its assessment of the ability to continue to use the ‘shortcut’ method” under Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, for certain prior periods.

According to the company, net income will increase by $4.8 million for the first quarter of fiscal 2006 and by $6.3 million for the second quarter, and decrease by $15.5 million for the third. Results for fiscal years 2001 and 2002 will be revised downward, while results for 2003, 2004, and 2005 will be revised upward.

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It also warned that the accounting change will “introduce significant volatility” to the company’s reported net income and earnings per share. Noting that the revisions will not impact cash flow, however, the car-rental company stressed that the accounting correction will not change the “highly effective nature” of its interest-rate swaps.

Dollar Thrifty elaborated that in connection with issuing asset-backed notes, in 2001 it launched a hedge program in which the company entered into interest-rate swap agreements to reduce its interest-rate risk. The company accounted for the swaps under FAS 133, which requires that all derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value, and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met.

The company elaborated that since 2001, it had applied the shortcut method of cash-flow hedge accounting under FAS 133, which allowed it to assume the effectiveness of those transactions. Dollar Thrifty stated, however, that it recently concluded that its interest-rate swaps did not qualify for the shortcut method in prior periods because of certain prepayment clauses.

“Therefore,” said a company statement, “fluctuations in the derivatives’ fair value should have been recorded through the income statement instead of through other comprehensive income (loss), which is a component of stockholders’ equity.”

Dollar Thrifty also pointed out that the interest-rate swaps would, the company believes, have qualified for hedge accounting under the long-haul method. The company noted, however, that hedge accounting under FAS 133 is not allowed retrospectively because the required documentation was not in place at the inception of the hedge.

The company expects that future interest-rate swaps will qualify under the long-haul method and be reflected under other comprehensive income (loss).

Dollar Thrifty also disclosed that it identified an error in its estimated effective state income tax rate, which resulted in a total overstatement of the net deferred state tax liability of approximately $5 million at December 31, 2005. The company will correct this error in the amendment to its 2005 annual report and its 2006 quarterly reports.