Navistar Restates: Not Always Best To Be Early

Nov.13.06 | About: Navistar International (NAV)

Navistar Financial, the financing arm that provides wholesale, retail and lease financing in the United States for sales of new and used trucks for parent Navistar (NAVZ.PK), filed a non-reliance 8-K covering periods from fiscal year 2002 through 2004. (It hasn’t filed its 2005 10-K nor any financials for 2006 yet because of an “an ongoing review of a number of accounting matters in connection with a restatement of its financial statements for the same period.”

Navistar Financial’s restatement has to do with early recognition of gains on assets transferred to a securitization trust - something not noticed here for a while. In securitization accounting, a sale is recognized when assets are transferred to a qualifying special purpose entity (a “QSPE”). This entity receives cash from investors and issues debt to them, which is serviced by the assets transferred to it. A sale - and any gain or loss on the sale - is recognized when the transfer of the assets to the QSPE is complete.

In Navistar Financial’s case, the company transferred notes to a trust over a multi-month period, and recognized each transfer as a sale. The problem is that the trust was not a full-fledged QSPE until all of the assets were transferred to it - so the individual transfers shouldn’t have counted as sales. From the sound of the 8-K, the sales must need to be squeezed into fewer periods, making the restated earnings in some period lower than before, and higher in others. No details given on the restatement effects on restated earnings, probably because they’re not finished examining things:

“The company is also reviewing other accounting matters including the models and assumptions used to calculate both the gain upon sale and the subsequent fair values of NFC’s retained interests in each securitization. The review and resolution of these matters and those being reviewed at Navistar could result in the identification of additional matters requiring correction or revision in the restated financial statements. This review process continues and matters identified at this stage, and any assessment of the nature, scope or dollar amount of the restatements, are preliminary and subject to change.”

Securitizations are one of the knottiest fair value estimations in reported financials. It’ll be interesting to see if anything else turns up on the “models and assumptions” issues. Stay tuned.