Notes to Consolidated Financial Statements
Note 24. Restatement of the Financial Statements
Subsequent to the issuance of our Consolidated Financial Statements for the year ended December 31, 2005, management concluded that our hedge accounting documentation and hedge effectiveness assessment methodologies related to particular hedges of callable fixed rate debt instruments funding our North American automotive operations did not satisfy the requirements of SFAS 133. One of the requirements of SFAS 133 is that hedge accounting is appropriate only for those hedging relationships for which a company has a sufficiently documented expectation that such relationships will be highly effective in achieving offsetting changes in fair values attributable to the risk being hedged at the inception of the hedging relationship. To determine whether transactions continue to satisfy this requirement, companies must periodically assess the effectiveness of hedging relationships both prospectively and retrospectively.
Management determined that hedge accounting treatment should not have been applied to these hedging relationships. As a result, we should not have recorded any adjustments on the debt instruments included in the hedging relationships related to changes in fair value due to movements in the designated benchmark interest rate. Accordingly, we have restated our Consolidated Financial Statements for the years ended December 31, 2005 and 2004 from the amounts previously reported to remove such recorded adjustments on these debt instruments from our reported interest expense during the affected years. The elimination of hedge accounting treatment introduces increased funding cost volatility in our restated results. The changes in the fair value of fixed rate debt previously recorded were affected by changes in the designated benchmark interest rate (LIBOR). Prior to the restatement, adjustments to record increases in the value of this debt occurred in periods when interest rates declined, and adjustments to record decreases in value were made in periods when interest rates rose. As a result, changes in the benchmark interest rates caused volatility in the debt’s fair value adjustments that were recognized in our historical earnings, which were mitigated by the changes in the value of the interest rate swaps in the hedge relationships. The interest rate swaps, which economically hedge these debt instruments continue to be recorded at fair value with changes in fair value recorded in earnings. We are also correcting certain other out-of-period errors, which were deemed immaterial, individually and in the aggregate, in the periods in which they were originally recorded and identified. These items relate to transactions involving certain transfers of financial assets, valuations of certain financial instruments, amortization of unearned income on certain products, income taxes and other inconsequential items. Because of this derivative restatement, we are correcting these amounts to record them in the proper period. For the effect of the restatement on the quarterly financial data refer to Note 25 to our Consolidated Financial Statements.
The following table presents the effects of the restatement on the Consolidated Income Statement. Certain amounts in the previously reported columns have been reclassified to conform to the 2006 presentation. The most significant reclassifications relate to servicing fees; amortization and impairment of servicing rights; servicing asset valuation and hedge activities, net and gain on sale of mortgage and automotive loans, net, which were previously included in mortgage banking income and other income and are now reflected as separate components of total net financing revenue and other income.
2005 |
2004 |
|||||||||||
Year ended December 31, ($ in millions) |
Previously reported |
Restated |
Previously reported |
Restated |
||||||||
Revenue |
||||||||||||
Consumer |
$ |
9,945 |
$ |
9,943 |
$ |
10,332 |
$ |
10,316 |
||||
Commercial |
2,685 |
2,685 |
2,177 |
2,177 |
||||||||
Loans held for sale |
1,652 |
1,652 |
1,269 |
1,269 |
||||||||
Operating leases |
7,032 |
7,032 |
6,563 |
6,563 |
||||||||
Total financing revenue |
21,314 |
21,312 |
20,341 |
20,325 |
||||||||
Interest expense |
12,930 |
13,106 |
9,535 |
9,659 |
||||||||
Net financing revenue before provision for credit losses |
8,384 |
8,206 |
10,806 |
10,666 |
||||||||
Provision for credit losses |
1,085 |
1,074 |
1,953 |
1,953 |
||||||||
Net financing revenue |
7,299 |
7,132 |
8,853 |
8,713 |
||||||||
Servicing fees |
1,730 |
1,730 |
1,547 |
1,547 |
||||||||
Amortization and impairment of servicing rights |
(869 |
) |
(869 |
) |
(1,112 |
) |
(1,112 |
) |
||||
Servicing asset valuation and hedge activities, net |
61 |
61 |
243 |
243 |
||||||||
Net loan servicing income |
922 |
922 |
678 |
678 |
||||||||
Insurance premiums and service revenue earned |
3,762 |
3,762 |
3,528 |
3,528 |
||||||||
Gain on sale of mortgage and automotive loans, net |
1,656 |
1,656 |
1,347 |
1,347 |
||||||||
Investment income |
1,216 |
1,216 |
845 |
845 |
||||||||
Other income |
4,352 |
4,399 |
3,416 |
3,470 |
||||||||
Total net financing revenue and other income |
19,207 |
19,087 |
18,667 |
18,581 |
||||||||
Expense |
||||||||||||
Depreciation expense on operating lease assets |
5,244 |
5,244 |
4,828 |
4,828 |
||||||||
Compensation and benefits expense |
3,163 |
3,163 |
2,916 |
2,916 |
||||||||
Insurance losses and loss adjustment expenses |
2,355 |
2,355 |
2,371 |
2,371 |
||||||||
Other operating expenses |
4,134 |
4,134 |
4,205 |
4,210 |
||||||||
Impairment of goodwill and other intangible assets |
712 |
712 |
– |
– |
||||||||
Total noninterest expense |
15,608 |
15,608 |
14,320 |
14,325 |
||||||||
Income before income tax expense |
3,599 |
3,479 |
4,347 |
4,256 |
||||||||
Income tax expense |
1,205 |
1,197 |
1,434 |
1,362 |
||||||||
Net income |
$ |
2,394 |
$ |
2,282 |
$ |
2,913 |
$ |
2,894 |
||||
The following table presents the effects of the restatement on the Consolidated Balance Sheet:
December 31, 2005 ($ in millions) |
Previously reported |
Restated |
||||
Assets |
||||||
Cash and cash equivalents |
$ |
15,424 |
$ |
15,424 |
||
Investment securities |
18,207 |
18,207 |
||||
Loans held for sale |
21,865 |
21,865 |
||||
Assets held for sale |
19,030 |
19,030 |
||||
Finance receivables and loans, net of unearned income |
||||||
Consumer |
140,411 |
140,436 |
||||
Commercial |
44,574 |
44,574 |
||||
Allowance for credit losses |
(3,116 |
) |
(3,085 |
) |
||
Total finance receivables and loans, net |
181,869 |
181,925 |
||||
Investment in operating leases, net |
31,211 |
31,211 |
||||
Notes receivable from GM |
4,565 |
4,565 |
||||
Mortgage servicing rights |
4,015 |
4,015 |
||||
Premiums and other insurance receivables |
1,873 |
1,873 |
||||
Other assets |
22,457 |
22,442 |
||||
Total assets |
$ |
320,516 |
$ |
320,557 |
||
Liabilities |
||||||
Debt |
||||||
Unsecured |
$ |
133,269 |
$ |
133,560 |
||
Secured |
121,138 |
121,138 |
||||
Total debt |
254,407 |
254,698 |
||||
Interest payable |
3,057 |
3,057 |
||||
Liabilities related to assets held for sale |
10,941 |
10,941 |
||||
Unearned insurance premiums and service revenue |
5,054 |
5,054 |
||||
Reserves for insurance losses and loss adjustment expenses |
2,534 |
2,534 |
||||
Accrued expenses and other liabilities |
18,381 |
18,224 |
||||
Deferred income taxes |
4,364 |
4,364 |
||||
Total liabilities |
298,738 |
298,872 |
||||
Equity |
||||||
Common stock and paid-in capital |
5,760 |
5,760 |
||||
Retained earnings |
15,190 |
15,095 |
||||
Accumulated other comprehensive income |
828 |
830 |
||||
Total equity |
21,778 |
21,685 |
||||
Total liabilities and equity |
$ |
320,516 |
$ |
320,557 |
||
The following table presents the effects of the restatement on the Consolidated Statement of Changes in Equity:
2005 |
2004 |
|||||||||||
Year ended December 31, ($ in millions) |
Previously reported |
Restated |
Previously reported |
Restated |
||||||||
Common stock and paid-in capital |
||||||||||||
Balance at beginning of year |
$ |
5,760 |
$ |
5,760 |
$ |
5,641 |
$ |
5,641 |
||||
Increase in paid-in capital |
– |
– |
119 |
119 |
||||||||
Balance at end of year |
5,760 |
5,760 |
5,760 |
5,760 |
||||||||
Retained earnings |
||||||||||||
Balance at beginning of year |
15,491 |
15,508 |
14,078 |
14,114 |
||||||||
Net income |
2,394 |
2,282 |
2,913 |
2,894 |
||||||||
Dividends paid |
(2,500 |
) |
(2,500 |
) |
(1,500 |
) |
(1,500 |
) |
||||
Repurchase transaction |
(195 |
) |
(195 |
) |
– |
– |
||||||
Balance at end of year |
15,190 |
15,095 |
15,491 |
15,508 |
||||||||
Accumulated other comprehensive income (loss) |
||||||||||||
Balance at beginning of year |
1,166 |
1,168 |
517 |
518 |
||||||||
Other comprehensive (loss) income |
(338 |
) |
(338 |
649 |
650 |
|||||||
Balance at end of year |
828 |
830 |
1,166 |
1,168 |
||||||||
Total equity |
||||||||||||
Balance at beginning of year |
22,417 |
22,436 |
20,236 |
20,273 |
||||||||
Increase in paid-in capital |
– |
– |
119 |
119 |
||||||||
Net income |
2,394 |
2,282 |
2,913 |
2,894 |
||||||||
Dividends paid |
(2,500 |
) |
(2,500 |
) |
(1,500 |
) |
(1,500 |
) |
||||
Repurchase transaction |
(195 |
) |
(195 |
) |
– |
– |
||||||
Other comprehensive (loss) income |
(338 |
) |
(338 |
) |
649 |
650 |
||||||
Total equity at end of year |
$ |
21,778 |
$ |
21,685 |
$ |
22,417 |
$ |
22,436 |
||||
Comprehensive income |
||||||||||||
Net income |
$ |
2,394 |
$ |
2,282 |
$ |
2,913 |
$ |
2,894 |
||||
Other comprehensive (loss) income |
(338 |
) |
(338 |
) |
649 |
650 |
||||||
Comprehensive income |
$ |
2,056 |
$ |
1,944 |
$ |
3,562 |
$ |
3,544 |
||||
The following table presents the effects of the restatement on the Consolidated Statement of Cash Flows:
2005 |
2004 |
|||||||||||
Year ended December 31, ($ in millions) |
Previously reported |
Restated |
Previously reported |
Restated |
||||||||
Operating activities |
||||||||||||
Net income |
$ |
2,394 |
$ |
2,282 |
$ |
2,913 |
$ |
2,894 |
||||
Reconciliation of net income to net cash (used in) provided by operating activities: |
||||||||||||
Depreciation and amortization |
5,964 |
5,964 |
5,433 |
5,433 |
||||||||
Goodwill impairment |
712 |
712 |
– |
– |
||||||||
Amortization and valuation adjustments of mortgage servicing rights |
782 |
782 |
1,384 |
1,384 |
||||||||
Provision for credit losses |
1,085 |
1,074 |
1,953 |
1,953 |
||||||||
Net gains on sales of finance receivables and loans |
(1,695 |
) |
(1,741 |
) |
(1,312 |
) |
(1,332 |
) |
||||
Net (gains) losses on investment securities |
(104 |
) |
(104 |
) |
(52 |
) |
(52 |
) |
||||
Capitalized interest income |
(23 |
) |
(23 |
) |
(30 |
) |
(30 |
) |
||||
Net change in: |
||||||||||||
Trading securities |
(1,155 |
) |
(1,155 |
) |
614 |
614 |
||||||
Loans held for sale |
(29,119 |
) |
(29,119 |
) |
(2,312 |
) |
(2,312 |
) |
||||
Deferred income taxes |
351 |
351 |
(118 |
) |
(118 |
) |
||||||
Interest payable |
(290 |
) |
(290 |
) |
311 |
311 |
||||||
Other assets |
(2,366 |
) |
(2,446 |
) |
2,468 |
2,426 |
||||||
Other liabilities |
49 |
45 |
(2,800 |
) |
(2,875 |
) |
||||||
Other, net |
315 |
568 |
1,011 |
1,167 |
||||||||
Net cash (used in) provided by operating activities |
(23,100 |
) |
(23,100 |
) |
9,463 |
9,463 |
||||||
Investing activities |
||||||||||||
Purchases of available for sale securities |
(19,165 |
) |
(19,165 |
) |
(12,783 |
) |
(12,783 |
) |
||||
Proceeds from sales of available for sale securities |
5,721 |
5,721 |
3,276 |
3,276 |
||||||||
Proceeds from maturities of available for sale securities |
8,887 |
8,887 |
7,250 |
7,250 |
||||||||
Net increase in finance receivables and loans |
(96,028 |
) |
(96,028 |
) |
(125,183 |
) |
(125,183 |
) |
||||
Proceeds from sales of finance receivables and loans |
125,836 |
125,836 |
108,147 |
108,147 |
||||||||
Purchases of operating lease assets |
(15,496 |
) |
(15,496 |
) |
(14,055 |
) |
(14,055 |
) |
||||
Disposals of operating lease assets |
5,164 |
5,164 |
7,668 |
7,668 |
||||||||
Change in notes receivable from GM |
1,053 |
1,053 |
(1,635 |
) |
(1,635 |
) |
||||||
Purchases of mortgage servicing rights, net |
(267 |
) |
(267 |
) |
(326 |
) |
(326 |
) |
||||
Acquisitions of subsidiaries, net of cash acquired |
(2 |
) |
(2 |
) |
9 |
9 |
||||||
Other, net |
(1,549 |
) |
(1,549 |
) |
260 |
260 |
||||||
Net cash provided by (used in) investing activities |
14,154 |
14,154 |
(27,372 |
) |
(27,372 |
) |
||||||
Financing activities |
||||||||||||
Net change in short-term debt |
(9,970 |
) |
(9,970 |
) |
4,123 |
4,123 |
||||||
Proceeds from issuance of long-term debt |
77,890 |
77,890 |
72,753 |
72,753 |
||||||||
Repayments of long-term debt |
(69,520 |
) |
(69,520 |
) |
(57,743 |
) |
(57,743 |
) |
||||
Other financing activities |
6,168 |
6,168 |
4,723 |
4,723 |
||||||||
Dividends paid |
(2,500 |
) |
(2,500 |
) |
(1,500 |
) |
(1,500 |
) |
||||
Net cash provided by financing activities |
2,068 |
2,068 |
22,356 |
22,356 |
||||||||
Effect of exchange rate changes on cash and cash equivalents |
(45 |
) |
(45 |
) |
295 |
295 |
||||||
Net (decrease) increase in cash and cash equivalents |
(6,923 |
) |
(6,923 |
) |
4,742 |
4,742 |
||||||
Cash and cash equivalents at beginning of year |
22,718 |
22,718 |
17,976 |
17,976 |
||||||||
Cash and cash equivalents at end of year |
$ |
15,795 |
$ |
15,795 |
$ |
22,718 |
$ |
22,718 |
||||