Freddie Mac’s 2001 decision to
report pro-forma Operating Earnings to reverse FAS 133
effects--given its restatement scandal-- should generate
new questions about accounting and disclosures for
hedging. Furthermore, companies that
have legitimately foregone hedge accounting to pursue
economic hedges (and Freddie Mac may still belong to
this group) that are ineligible for such accounting will
have a lot more explaining to do if these result in a
material earnings impact.
And ironically, this was precisely what
Freddie Mac was attempting to do by creating its FAS
133-adjusted Operating Earnings concept. Unfortunately,
as a result, the failed Freddie Mac example will
increase pressure on companies to pursue only those
hedging strategies that will be eligible for hedge
accounting (or go through the mental and documentation
gymnastics to make them eligible). The risk then, which
applies for the vast majority of hedgers, is that
analysts looking for a story will dig into OCI and
attempt to make their own decisions on the assumptions
allowing the hedge gains and losses being deferred
there--creating in effect their own pro-forma “Operating
Earnings.” A dangerous precedent indeed.
Background
On January 1, 2001, Freddie Mac
implemented SFAS 133, which requires the corporation to
recognize on the balance sheet all derivatives as either
assets or liabilities measured at their fair value (see
Note 1 to the Consolidated Financial Statements).
Beginning with itsfirst quarter 2001 reporting,
Freddie Mac began providing a supplemental performance
measure known as Operating Earnings. Management believes
that results presented on an operating basis,while not a
defined term within GAAP nor comparable in many cases to
supplemental performance measures used by other
companies, are beneficial in understanding and analyzing
Freddie Mac’s financial performance because they better
reflect the economic effect ofFreddie Mac’s
risk management activities.
Freddie Mac’s operating earnings,
along with corresponding ratios, reflect adjustments for
certain income statement effects of SFAS
133.These adjustments relate primarily to the
timing of derivative income and expense recognition.
Table 21 and the discussion that follows address the
differences between GAAP net income (i.e., reported net
income) and operating earnings for 2001.
--From Freddie Mac’s 2001 Annual Report
(see report for full details).
