GE Capital: Rewriting Derivatives Accounting

From AAO Weblog

It’s been a while since one of these showed up: a derivatives accounting restatement. This morning, General Electric Capital filed a non-reliance 8-K on in its 10-Ks and 10-Qs for the years and for each of the quarters in the years 2005, 2004, 2003, 2002 and 2001, and for each of the first three quarters of 2006. That’s a lot of territory; it goes back to the first application of Statement 133. According to the amended 2005 10-K, it amounted to a decrease in earnings from continuing operations of $421 million over that five year span. Balance sheet effects: deemed immaterial.

Cause of the restatement? “… a material weakness in internal control over financial reporting, namely, that we did not have adequately designed procedures to designate, with the specificity required under SFAS 133, each hedged commercial paper transaction.”

From the sound of the 8-K and the 10-K, GECC and the auditors believed that the documentation governing the hedging instruments were specific enough to support the accounting treatment used; the Office of the Chief Accountant disagreed. The SEC continues to investigate GE Capital’s application of SFAS 133 and hedge accounting, according to the filings.

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