Accounting for Derivatives Leads to GE Restatement

General Electric Co. has announced it will restate earnings for the last three years – upward not downward – because the way it recorded derivatives violated accounting rules.

The restatement will result in an earnings increase of $381 million, about 0.6 percent of the $65 billion that GE made during that period, the company said.

GE's internal auditors had already begun reviewing derivatives accounting before the Securities and Exchange Commission began an informal probe in January.

GE held a conference call with analysts last week, assuring them that future derivatives accounting would comply with the rules, which are complex and controversial. SFAS 133 requires companies to report changes in the values of derivatives and add or subtract them from profits. Chief Executive Jeffrey R. Immelt and Chief Financial Officer Keith S. Sherin also said the restatement is not a symptom of a larger accounting problem.

"The fact that GE uncovered this and brought it forward is a testament to its extremely rigorous auditing and internal controls," Jeffrey Sprague, an analyst with Citigroup, said in a report to clients, according to the New York Times. Share prices held steady after the news.

Accounting expert Jack Ciesielski told Forbes magazine: "It's a happy restatement for GE," noting that it "can blame the complexity" of the rules, or it can "blame the auditors. Bottom line, it's a messy set of transactions that are complex in and of themselves – and so will be the accounting for them."

He added, "GE is a crackerjack outfit, and it had problems. Do you wonder how many firms that have control weaknesses in the area of 'qualified personnel' have gotten this accounting wrong as well-in the opposite direction?"

Failing to fully follow SFAS 133 has also tripped up mortgage giant Fannie Mae and insurer American International Group.


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