SAN DIMAS, Calif. — After ten months of discussions and review by KPMG, LLP, WesCorp recently reported that it has received approval from the auditing firm to release its 2006 audited financial statements.
The delay in publishing the 2006 audited financials was due to "a difference of opinion" in the interpretation of Statement of Financial Accounting Standards 133 for certain derivative transactions used in WesCorp's hedging strategies to manage interest rate risk, according to WesCorp.
The resolution will see WesCorp restate its earnings for the year 2005, make adjustments for 2006, as well as revise its hedge accounting practices for 2007, WesCorp said. In aggregate, the restatement will result in an increase to WesCorp's income and retained earnings.
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"This year alone (2007), we have realized a positive adjustment to net income of $22.1 million at the close of September," said Todd Lane, executive vice president and chief financial officer at $33 billion WesCorp. "That positive adjustment to net income offsets the negative adjustment resulting from the restatement of 2005."
The adjustments will show WesCorp reporting earnings that are $16.1 million higher than previously reported over the period 2005 to September 2007, WesCorp said. The year 2005 will show a negative adjustment of $22.9 million, however, year 2006 as well as year 2007 up to the close of September's financials "will more than compensate for the negative adjustment by showing positive increases" to net income of $16.9 million and $22.1 million, respectively.
"As we were working closely with KPMG on the 2006 audit, we arrived at the conclusion that some of our documentation for certain hedge transactions did not meet the qualifications for hedge accounting under the 'short cut' methodology," Lane said. "Interpretations of SFAS 133 in 2005 differ from those of today. Therefore, by restating our financials, we clearly demonstrate to our member depositors and others with whom we invest that WesCorp's financial statements adhere to the most recent guidance for accounting treatment of hedge transactions under SFAS 133."
While WesCorp management believed that most of the hedges occurring during the periods under review would have qualified for hedge accounting under the "long haul" methodology, that accounting cannot be applied retroactively. Consequently, the restatement assumes hedge accounting was not applicable to these derivatives and the related hedged item, according to WesCorp.
The shortcut methodology, a practice WesCorp said it and many other financial institutions have since abandoned, permits the user to assume no ineffectiveness if the company meets certain strict criteria. As a result, ongoing effectiveness testing is not required. However, if the criteria are not met in their entirety, the company must use the "long haul" methodology, "requiring extensive documentation, analysis and testing at the creation of the hedge and during its lifespan."
"WesCorp is deeply committed to maintaining a conservative, high-quality investment portfolio," Lane said.
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