American General restates derivatives by $41.5 million

American General Finance, the Indiana-based consumer loans specialist, has become the latest US company to restate its results because of mistakes in applying accounting rules. The company announced it would adjust income upwards by $41.5 million for the first three quarters of 2005.

According to the 8-K filing lodged with the US regulator the Securities and Exchange Commission, American General said it had discovered that four of its cross currency swaps had not met the requirements under the Financial Accounting Standards 133 rules for short-cut accounting. As a result, the company will have to mark-to-market the gains and losses of the derivatives on quarterly and annual reports.

“We did not maintain effective controls over the accounting for derivatives,” said American General in the filing. “Specifically, our controls were not effective in ensuring the proper designation and documentation of our foreign currency swaps. Accordingly, management has concluded that this control deficiency constitutes a material weakness.”

Under the rules, derivatives that are expected to have a fair value of zero against the hedged asset do not have to be declared in financial statements. Companies can avoid income volatility caused by mark-to-marketing the derivative at each accounting period, although the loophole in the rules requires extensive paperwork and stress testing.

The short-cut method has caught out a number of high-profile companies in the past year, including Bank of America, CIT Group and General Electric. America International Group, American General’s parent company, also restated its results back to 2000 last year owing to incorrect accounting for derivatives.

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