First Data Corp. said it will restate results for 2005 and for the first two quarters of 2006 after “extensive interaction” with the Securities and Exchange Commission regarding its accounting treatment for certain derivative instruments.
The credit-card and payment-processing giant said the derivatives relate to interest rate swaps associated with its official check business and foreign exchange forward contracts associated with its Western Union business.
The company also expects to restate certain financials for The Western Union Co.
First Data noted that its accountant, Ernst & Young, believed the initial accounting treatment for the derivative instruments properly reflected the intent and economics of the underlying transactions. In its statement, First Data added that the interpretations of how to apply FAS 133 (the accounting standard for derivatives) and how to adequately provide documentation for the instruments so they qualify for hedge accounting “are very complex and continue to evolve.”
As CFO magazine reported last May, 57 companies restated their earnings in 2005 because of faulty hedge accounting, up from 27 in 2004 and 13 in 2003, according to Glass Lewis Co. of San Francisco.
Citing a desire “to avoid any drawn out appeals process with the SEC,” the company said its audit committee concluded that certain of its interest rate swap and foreign exchange forward contracts may not have qualified for cash flow hedge accounting since the initial documentation with respect to these instruments did not meet the technical requirements of SFAS 133.
The company said there is no effect on overall cash flows, stockholders’ equity, total assets or total liabilities from the revised treatment.
Altogether, the company said the restatements would result in a $30 million increase in non-cash earnings. It said it overstated earnings by $300 million prior to December 2002 and understated earnings by $330 million from 2003 through the first half of this year.
Investors apparently didn’t think the announcement — made after the market closed on Tuesday — was a big deal. First Data’s stock opened Wednesday up more than one-half of one percent.