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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (68682)	8/23/2006 5:06:14 PM
From: shades	Respond to of 110194

Derivatives Restatement accountingobserver.com First Data’s Derivatives Restatement August 23rd, 2006 \| Filed under General, Section 404, Derivative Shortcuts That Weren't - by Jack Ciesielski @ 7:29 am Late in 2005, many companies were restating their financials because they had improperly taken the “shortcut” justification for skipping effectiveness testing in their accounting for interest rate swaps. Some firms had failed to sufficiently document their intention and justification for using hedge accounting - an explicit requirement of Statement 133, which governs derivatives accounting. For a time, it seemed like there would be a tidal wave of restatements, like what was observed with operating lease accounting in early 2005. The derivatives restatements trailed off early in 2006. One Johnny-come-lately showed up yesterday, however: First Data Corporation raised the non-reliance flag on its financials as of and for the years ended December 31, 2003 through December 31, 2005 and as of and for the quarters ended March 31, 2006 and June 30, 2006. Reason: “… the accounting treatment afforded certain derivative instruments relating to the Company’s interest rate swaps associated with its official check business and foreign exchange forward contracts associated with its Western Union business. Consequently, the Company plans to restate its Annual Report on Form 10-K for the year ended December 31, 2005 and its Quarterly Reports on Form 10-Q for each of the quarters ended March 31, 2006 and June 30, 2006.” Restatements are also in order for Western Union, too. Put First Data into the derivative restater category of “insufficient documentation.” And also into the category of “deep denial.” In their 8-K, they state that “interpretations of how to apply Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (”SFAS 133?), and how to adequately provide documentation for such instruments so as to qualify for hedge accounting are very complex and continue to evolve.” Statement 133 is quite clear that such transactions need to be documented: in a document that’s already overly-prescriptive and bloated to something in excess of 850 pages, it’s hard to believe that more instructions are needed for sharp accounting and finance people on how to document a decision they’ve made. First Data points out that there’s “no effect on overall cash flows, Total Stockholders’ Equity, Total Assets or Total Liabilities from this revised treatment” and that “On a cumulative basis subsequent to the adoption of SFAS 133 and through June 30, 2006, FDC’s Consolidated Net Income would have been approximately $30 million higher than that reported. Consolidated Net Income subsequent to the adoption of SFAS 133 and through December 31, 2002 would have been approximately $300 million lower than that reported. Consolidated Net Income would have been higher than that reported in each of 2003, 2004 and 2005 by approximately $90 million, $30 million, and $130 million, respectively. In addition, Consolidated Net Income would have been higher than that reported for the quarters ended March 31, 2006 and June 30, 2006 by approximately $55 million and $25 million, respectively.” Those annual differences work out to understatements of net income of 8%, 2% and 6%, respectively in 2005, 2004, and 2003 - and an overstatement of 17% for the combined years of 2002 and 2001 . (First Data adopted Statement 133 at the beginning of 2001.) That makes it one of the more notable restatements related to this topic. Paying homage to that goddess Volatility, “As expeditiously as possible following the filing of this form, the Company intends to redesignate the affected derivative instruments as hedges with revised documentation and to account for them as hedging instruments in accordance with SFAS 133 so as to remove this source of potential volatility in reported financial results going forward.” No mention of what the explicit cash costs will be for removing the source of potential volatility. Maybe shareholders would accept a little volatility if they knew what they were paying for it. All told, this a pretty interesting derivatives rewrite - and not just because of its size and historical scope. Most of the rewrites observed in late 2005 and early 2006 involved financial institutions. In fact, quite a few were smallish banks. So First Data is an outlier in the industry sense. Second, First Data’s internal control self-assessment in 2004 and 2005 was that everything was working as it should and their auditors agreed. The restatement contradicts that - but with the restatement, it’s likely that the internal controls will be effective at year end 2006. Sort of ironic.

To: russwinter who wrote (68682)	8/23/2006 5:44:38 PM
From: bart13	Read Replies (1) \| Respond to of 110194

So far wash, rinse, repeat on these fronts is still chugging along. Yes, and regular real estate loans at all commercial banks were still chugging along at 11-13% annual change rate as of the July data. I've never watched a probable roll over this closely before and its a real eye rubber. On top of that the temp OMO repo pool and the TIO pool are very near the bottom of their ranges recently, there hasn't been a perm OMO for over a month... and the S&P is only down a little and super skittish? I think I need to change my Kool-Aid flavor...