Wachovia Corporation, as a result of its analysis of a ruling in BB&T Corporation v. the United States on 29 April 2008, expects to record an after-tax non-cash charge of between $800 million and $1 billion in the second quarter of 2008.
Wachovia expects to provide additional information when it files its 2008 First Quarter Report on Form 10-Q.
Wachovia entered into various leasing transactions between 1999 and 2003 involving lease-to-service contracts and leases of qualified technological equipment, which are widely known as sale-in, lease-out or “SILO” transactions. Wachovia stopped originating these transactions in 2003.
In 2006, the FASB issued guidance on the accounting treatment of leveraged leasing transactions. Previously, changes in the timing of tax cash flows did not require any change in the amount of income recognized under a leveraged lease.
With the issuance of FASB Staff Position FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2), and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109” (FIN 48), changes affecting the timing of income tax cash flows but not the total net income under a leveraged lease trigger a recalculation of the net investment in the lease. Where tax cash flows are reduced or delayed, this recalculation results in a one-time non-cash charge to earnings.
On29 April 2008, the US Court of Appeals for the Fourth Circuit issued an opinion in the BB&T case that disallowed tax benefits associated with certain of BB&T’s lease-in, lease-out (LILO) transactions. Although the BB&T decision involved LILOs, Wachovia believes some portions of the decision may also apply to SILO transactions. There has not yet been any judicial decision that directly involves SILOs, so the tax law as applied to SILOs remains unsettled.
However, applicable accounting standards require Wachovia to update the assessment of its SILO transactions in light of the BB&T decision. The decision has no impact on Wachovia’s LILO transactions, which were settled in their entirety in 2004.
Although Wachovia continues to believe its SILO transactions comply with applicable laws, in light of the BB&T decision, under the principles established by FSP 13-2 and FIN 48, the non-cash charge to earnings is currently estimated to be in the range of $800 million to $1 billion and this approximate amount would be recognized as income over the remaining terms of the affected leases, generally 35 to 40 years.