BoA mis-states derivatives positions by $345 million

Bank of America has contravened Financial Accounting Standards Board (FASB) rules regarding its treatment of derivatives instruments and will recalculate all of its financial statements since 2002.

Foreign exchange and interest rate derivatives were wrongly classified as qualifying for 'short cut' accounting, which only requires final values of derivatives to be calculated instead of having to work out the mark-to-market position of the instruments at each accounting period. The problem, discovered following an internal review, caused the bank to underestimate its income over the period by $345 million.

Bank of America could now face legal action or a fine from the Securities and Exchange Commission (SEC), the US financial regulator. But the bank is warning that uncertainties in the FASB 133 rules, which were introduced back in 1999, could cause further problems. It said 40 companies this year have been forced to restate their financial reports following rule clarifications, but the SEC declined to comment on the figure.

“This is not an isolated incident,” a spokesman for the bank told RiskNews. “There was general consensus out there that there was difficulty in understanding the rules,” he added. However, dealers such as Bank of America regularly provide guidance on rules regarding derivatives hedging rules to their own clients.

“The interpretations of how to apply [FAS 133] continue to evolve,” said Alvaro de Molina, the bank’s chief financial officer. “In light of recent interpretations, we reviewed our accounting treatment of certain hedge transactions and determined a restatement would assure that our financial statements adhere to the most recent guidance for accounting treatment of hedge transactions under [FAS 133].”

The SEC would not rule in or out any possible action against Bank of America.