The Timberland Company said its accounting for foreign currency hedges will force a restatement.
The footwear and apparel maker warned investors not to rely on annual or quarterly financial statements for the fiscal years 2001 through 2006. In addition, the company said it will restate its financial statements and other financial information for the years 2004 through 2006 and financial information for 2002 and 2003, and for each of the quarters in years 2005 and 2006.
The company said the revisions will reduce retained earnings by less than $10 million, adding that revenues, cash flow and liquidity will not be impacted by the restatement.
Under its previously applied hedge accounting treatment, the derivative gains and losses designated as cash flow hedges had been included as a component of equity until the hedged transactions were settled, at which time the hedging gains and losses were reclassified to the income statement.
The restatement will include these gains and losses in earnings on a current basis as the changes in value of the derivatives occur. “Accordingly, the timing of when the gains and losses will be recognized in earnings will be changed,” it added.
“We constantly monitor interpretations of accounting standards by regulators and accounting professionals to evaluate our accounting practices,” emphasized CFO John Crimmins, in a statement.
The company explained that FAS 133 allows companies to assert that the critical terms of a hedged item and those of the hedging derivative instrument match. These critical terms include the underlying currency, amount, and timing.
When these conditions are met, the hedging approach referred to as the matched-critical terms method may be applied. “Recent clarification by the SEC regarding the application of the matched-critical terms method, specifically the match between the timing of settlement payments between the hedged item and the hedging instrument, has led the company to the conclusion that the settlement of its derivatives which occur at the end of each fiscal quarter do not effectively match the revenue of its business which is recorded on a daily basis,” Timberland added.
As a result of this mismatch, the company’s hedging activity does not qualify for hedge accounting treatment under this approach, it acknowledged.