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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

May 30

Written by: Jack Ciesielski
5/30/2006 6:54 AM 

It seems almost like years, but just about six months ago, the accounting buzz centered on "hedge accounting shortcut restatements." It seemed as if every financial institution, large or small, had taken liberty with a derivatives accounting shortcut for which they did not genuinely qualify.

Bank of America was one of those restaters, you may recall. They also had deftly blamed the standard's complexity and "recent interpretations" of the standard for their self-examination. (Note: there were no real new interpretations. Just an enforcement of existing ones.) BofA indicated they'd be examining their practices going back five years and perform a restatement if necessary.

Looks like they're finished, as indicated by this 8-K filing. The surprise: undoing the hedge treatment increased their 2001 earnings by 10.4%. Undoing the accounting treatment also aided 2002 earnings by 3.3%, and decreased earnings by 2.5%, 1.4%, and .5% in 2005, 2004, and 2003, respectively. There's a bit (admittedly, a small bit) of empirical evidence for you: is it really worth the cost and accounting bother to hedge transactions, just to preserve an earnings number or trend? Managements will tell you yes, because Wall Street demands it. You still have to wonder.