Servicing Is Not at Issue In Bank of America's Slip
Bank of America is restating its earnings back through 2002 to reflect a change in its interpretation of accounting rules pertaining to derivative instruments used to hedge interest rate risk exposure and foreign exchange exposure.
The restatement will increase earnings by $345 million cumulatively - including a beginning balance adjustment prior to 2002 - as changes in the value of hedging instruments, which previously had been subject to hedge accounting treatment, are marked-to-market for the reporting periods involved.
However, the restatement shaved $421 million, or $0.10 per share, from the bank's 2005 earnings. Earnings for 2004 and 2003 were also reduced.
The bank said that by using a "short cut" methodology, it had classified the derivatives as hedge instruments. But it now believes that under Financial Accounting Statement 133, many of the transactions affected by the restatement did not qualify for this "short cut" method of designating hedge instruments.
Bank of America said its financial strength is "not adversely affected" by the restatement, which will cause shareholders equity to be adjusted upward by $308 million, or less than 1%. However, the restatement means that quarterly and annual reported income for the restated periods will show greater fluctuations. In making the decision to restate earnings, the bank said it discussed matters with its external auditor, PricewaterhouseCoopers.
"The interpretations of how to apply FAS 133, a quite complex standard, continue to evolve," said chief financial officer Alvaro de Molina in a Bank of America news release. "We monitor interpretations of accounting standards by regulators and accounting professionals as well as recent industry practices to evaluate our accounting practices. In light of recent interpretations, we reviewed our accounting treatment of certain hedge transactions and determined a restatement would assure that our financial statements adhere to the most recent guidance for accounting treatment of hedge transactions."
Bank of America serviced $368 billion of home loans at the end of last year. A spokesperson for the bank said that while Bank of America does hedge its mortgage servicing rights, the bank's MSR hedges were not a part of the restatement.
Mortgage servicing rights can drop in value significantly when interest rates decline.
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