According to the mortgage giant, completion of the review by KPMG is subject to resolution of its accounting issues and the independent auditor’s “completion of certain other procedures, including its evaluation of results that are not yet available of the investigation of certain matters in the Ofheo report”, dated September 20.
In addition, Fannie Mae may needs to restate its financial results for previous periods if the Ofheo examination reveals it did not qualify for hedge accounting. “The effect on current and past Generally Accepted Accounting Principles (GAAP) and core business earnings would be significant,” stated Fannie Mae. “If Fannie Mae does not qualify for hedge accounting for all periods since its January 1, 2001 adoption of FAS 133, the company estimates it would be required to record in earnings a net cumulative after-tax loss on its derivatives transactions of approximately $9.0 billion as of September 20, 2004,” the release stated.
Under hedge accounting, an organisation can defer gains and losses to the extent the “hedge” is effective. Under question is whether Fannie Mae wrongly assumed “perfect effectiveness” for many of its hedges.
In related news, Fannie Mae will release its October 2004 Monthly Financial Summary report - containing business volumes, delinquency rates and interest rate risk disclosures - on November 19.