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PBI » Topics » Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial StatementsThis excerpt taken from the PBI 10-K filed Mar 1, 2007. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for the purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 allows registrants to adjust for the cumulative effect of certain errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption provided that management has properly concluded that the errors were not material to prior periods. SAB 108 is effective for
fiscal years ending after November 15, 2006. In 2006, we determined that the accounting for certain leveraged lease transactions in Canada was misstated due to changes in assumptions having occurred prior to 2000 which impacted net income from the leases. Such changes in assumptions require the leveraged lease pricing models to be revised. These misstatements were immaterial to prior periods, however correction in the current period would have had the effect of reducing our pre-tax income and our tax provision by $48 million and $43 million, respectively, which was considered material to the current period financial statements. Accordingly, we corrected these misstatements by adjusting opening retained earnings in 2006 by $5 million. As part of this adjustment, we also decreased our investment in leveraged leases by $33 million, increased other non-current liabilities by $15 million and decreased deferred taxes on income by $43 million.
2. Discontinued Operations On May 1, 2006, we completed the sale of our Imagistics lease portfolio to De Lage Landen Operational Services, LLC, a subsidiary of Rabobank Group, for approximately $288 million. Net proceeds on the sale were approximately $282 million after transaction expenses. We have reported the results of the Imagistics lease portfolio in discontinued operations including an after-tax gain of approximately $11 million from the sale of this portfolio. Imagistics’ results were previously included in our Capital Services segment. Accordingly, prior year results have been adjusted to be reflected as discontinued operations. On July 14, 2006, we completed the sale of our Capital Services external financing business to Cerberus Capital Management, L.P. (Cerberus) for approximately $747 million and the assumption of approximately $470 million of non-recourse debt and other liabilities. This sale resulted in the disposition of most of the external financing activity in the Capital Services segment. The proceeds received at closing were used to pay our tax obligations. We have reported the results of the Capital Services business in discontinued operations including an after-tax loss of $445 million from the sale of this business. Prior year results have also been adjusted to be reflected as discontinued operations. We have retained certain leveraged leases in Canada which are now included in our International Mailing segment. In August 2006, we reached a settlement with the Internal Revenue Service (IRS) on all outstanding tax audit issues in dispute for tax years through 2000. Years after 2000 are still under review by the IRS. In connection with the settlement, we recorded $61 million of additional tax expense of which $41 million was included in discontinued operations. See Note 9 for further discussion of the IRS settlement. 52 PITNEY BOWES INC. We accrued in discontinued operations an additional tax expense of $16 million to record the impact of the recently-enacted Tax Increase Prevention and Reconciliation Act (TIPRA). The TIPRA legislation repealed the exclusion from federal income taxation of a portion of the income generated from certain leveraged leases of aircraft by foreign sales corporations (FSC). In December 2006, we sold our bankruptcy claim related to certain aircraft leases with Delta Airlines. We received proceeds of $14.5 million, which represent a contingent gain pending the bankruptcy court decision. The following table shows selected financial information included in discontinued operations for the years ended December 31:
Interest expense included in discontinued operations was $19.2 million, $11.5 million and $10.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Interest expense recorded in discontinued operations consisted of interest on third-party debt that was assumed by Cerberus. We have not allocated other consolidated interest expense to discontinued operations. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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