Restatement
As discussed in Note 1 and Note 23 of the Consolidated Financial Statements, we are restating our historical financial statements for the years 2004 and 2003, for the quarters in 2005 and 2004, and other selected financial data for the years 2002 and 2001
(see Table 2 and Table 3 for the restatements of Five-Year Summary of Selected Financial Data, and Supplemental Financial Data and Reconciliations to GAAP Financial Measures). These restatements and resulting revisions relate to the
accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). The Corporation is
presenting this restatement in its 2005 Annual Report on Form 10-K.
The Corporation uses interest rate contracts and foreign exchange contracts in its Asset and Liability Management (ALM) process. Use of such derivatives enables us to minimize significant fluctuations in earnings caused by interest rate and
currency rate volatility. The Corporation had applied hedge accounting for certain derivative transactions that we believe met the requirements of SFAS 133. The application of hedge accounting produced financial statement results that were
consistent with the economics of these transactions and our risk management activities. Hedge accounting reduces volatility in earnings by counterbalancing the changes in the hedged item and the derivative. As a result of a recent interpretation on the “shortcut” method for derivative instruments under SFAS 133, the Corporation undertook a review of all hedge accounting transactions, which was completed in the first quarter of 2006. Based on the review, we determined that certain hedges did not meet the requirements of SFAS 133. Since we could not apply hedge accounting for those transactions, the derivative transactions have been marked to market through our Consolidated Statement of Income with no related offset for hedge accounting. Accordingly, changes in interest rates and currency rates which impact the fair value of derivative instruments have had a direct impact on our Net Income.
The following tables set forth the effect of the adjustments described above on Net Income for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 and for the quarterly periods in 2005 and 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on
Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information.
Increase (Decrease) in Net Income(1)
|
| Year Ended December 31
|
|
| (Dollars in millions) |
|
2005(2)
|
| 2004
|
| 2003
|
| 2002
|
| 2001
|
|
| As Previously Reported Net income |
|
$ |
16,886 |
|
|
$ |
14,143 |
| $ |
10,810 |
| $ |
9,249 |
| $ |
6,792 |
|
|
| Internal fair value hedges |
|
|
(271) |
| (190) |
| (144) |
| 406 |
| 226 |
|
| Internal cash flow hedges |
|
|
25 |
|
| (281) |
| 104 |
| (176) |
| 424 |
|
| Other, net |
|
|
(175) |
| 275 |
| (9) |
| 74 |
| 57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total adjustment |
|
|
(421) |
| (196) |
| (49) |
| 304 |
| 707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restated Net income |
|
$ |
16,465 |
|
|
$ |
13,947 |
| $ |
10,762 |
| $ |
9,553 |
| $ |
7,499 |
|
| Percent change |
|
|
(2.5)% |
| (1.4)% |
| (0.5)% |
| 3.3% |
| 10.4% |
|
| Footnote (1) |
|
For presentation purposes, certain numbers have been rounded. |
| Footnote (2) |
|
The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006. |
Increase (Decrease) in Quarterly Net Income(1) (2)
|
| 2005
|
| 2004
|
|
| (Dollars in millions) |
|
Fourth(3)
|
| Third quarter
|
| Second quarter
|
| First quarter
|
| Fourth quarter
|
| Third quarter
|
| Second quarter
|
| First quarter
|
|
| As Previously Reported Net income |
|
$ |
3,768 |
|
|
$ |
4,127 |
|
|
$ |
4,296 |
|
|
$ |
4,695 |
|
|
$ |
3,849 |
| $ |
3,764 |
| $ |
3,849 |
| $ |
2,681 |
|
|
| Internal fair value hedges |
|
|
(74) |
| |
(148) |
| |
130 |
|
|
|
(179) |
| (76) |
| 157 |
| (435) |
| 164 |
|
| Internal cash flow hedges |
|
|
(43) |
| |
(29) |
| |
125 |
|
|
|
(28) |
| 18 |
| (111) |
| 146 |
| (334) |
|
| Other, net |
|
|
(77) |
| |
(108) |
| |
106 |
|
|
|
(95) |
| 65 |
| 293 |
| (219) |
| 137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total adjustment |
|
|
(194) |
| |
(285) |
| |
361 |
|
|
|
(302) |
| 7 |
| 339 |
| (508) |
| (33) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restated Net income |
|
$ |
3,574 |
|
|
$ |
3,841 |
|
|
$ |
4,657 |
|
|
$ |
4,393 |
|
|
$ |
3,855 |
| $ |
4,103 |
| $ |
3,341 |
| $ |
2,648 |
|
| Percent change |
|
|
(5.1)% |
| |
(6.9)% |
| |
8.4% |
| |
(6.4)% |
| 0.2% |
| 9.0% |
| (13.2)% |
| (1.2)% |
|
| Footnote (1) |
|
See Note 23 of the Consolidated Financial Statements for Restatement of Quarterly Financial Statements (unaudited). |
| Footnote (2) |
|
For presentation purposes, certain numbers have been rounded. |
| Footnote (3) |
|
The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006.
|
During the first quarter of 2006, the Corporation terminated certain derivatives used as economic hedges as part of the ALM process that did not qualify for SFAS 133 hedge accounting and entered into new derivative contracts to hedge certain of its exposures to changes in interest rates
and foreign currency rates. These new contracts are designated in hedging relationships and meet the requirement for SFAS 133 hedge accounting. Prior to the termination of the economic hedges noted above, the changes in fair value of such contracts
were recorded in Other Income and had a direct impact on Net Income. As a result, we estimate that Net Income will be reduced by approximately $0.03 per share in the first quarter of 2006.
|
