Sara Lee Cooks Up a Fair-value Restatement

It changes the way it presents commodity derivatives within its segments.
Stephen TaubOctober 30, 2008

Sara Lee Corp. restated its results for the past two fiscal years, and quarterly results for fiscal 2008, reflecting fair-value issues and other accounting changes.

The maker of food and beverage and household and body-care products — including those sold under the Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, and Kiwi brands — said that in fiscal 2009 it changed the way it presents commodity derivatives within its segments. It uses derivative financial instruments to manage its exposure to commodity prices, it noted.

A commodity derivative not declared a hedge under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, is accounted for under mark-to-market accounting with changes in fair value recorded in the income statement, Sara Lee explained. Prior to fiscal 2009, gains and losses on unrealized commodity derivatives accounted for under mark-to-market accounting were included in segment operating income.

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In fiscal 2009, Sara Lee, which is holding its annual meeting this morning, said it will now include these mark-to-market gains and losses in general corporate expenses until the exposure being hedged affects the earnings of the business segment. At that time, the cumulative gain or loss previously recorded in general corporate expenses for the derivative instrument will be reclassified into the business segment’s results.

Also beginning in fiscal 2009, Sara Lee said that it implemented certain changes to its North American organizational structure that primarily involved the transfers of the frozen bakery and beverage operations from the North American Retail Bakery segment into the North American Retail Meats segment, and a small component of the Foodservice meats operation into the North American Retail Meats segment. As a result, the three North American segments have been renamed as follows – North American Retail (previously North American Retail Meats), North American Fresh Bakery (previously North American Retail Bakery) and North American Foodservice (previously Foodservice).

“This restatement provides greater clarity about the actual performance of our segments by eliminating the volatility created by mark-to-market accounting from the segment results,” said L.M. de Kool, executive vice president and chief financial and administrative officer. “And, at the same time, we made minor changes to our business segment structure to better reflect how we do business.”

The company stressed the changes in the business segment reporting did not impact the international segments and did not have a material impact on the segment assets of the North American operations.