Delphi needs more time to file 10-Q in light of potential hedge designation issue

By Caroline Salls

Pittsburgh, Nov. 8 - Delphi Corp. said it will require more time to complete its financial statements and file its 10-Q for the quarter ended Sept. 30 in connection with a potential issue with the designation of hedges related to foreign currency, according to an 8-K filing with the Securities and Exchange Commission.

The potential issue was found during the audit of the company's 2006 consolidated financial statements and performing related interim procedures for the third quarter.

Specifically, Delphi said it became aware that the hedge designation for foreign currency forward contracts it had entered into to hedge exposure to foreign currency fluctuations may not have satisfied technical accounting rules under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) to qualify for exemption from the more strict effectiveness testing requirements.

Delphi is working with its current and former independent public accounting firms to review the accounting treatment accorded to these contacts.

According to the filing, the requirement under FAS 133 is to recognize the foreign currency forward contract as either an asset or liability in the statement of financial position and measure that instrument at fair value at the end of each period.

Changes in fair value are recognized in earnings in the period of the change, except in the case of a hedge, for which the effective portion of the hedge's gain or loss is instead reported as a component of other comprehensive income or loss and subsequently reclassified into earnings once the underlying transaction ultimately settles.

The documentation standards to designate a derivative contract as a qualifying hedge must be met at the time the contract is entered into.

Delphi said it had historically designated its foreign currency forward contracts as hedges and recorded changes in value during each period prior to settlement as other comprehensive income or loss.

The company said the potential change to the accounting for these contracts does not affect cash flows, but it may change the timing of recognizing the previously deferred gains or losses on the foreign currency forward contracts in earnings for the periods impacted.

The terms of Delphi's debtor-in-possession financing require that the company furnish its lenders with copies of its periodic filings when they are due to be filed with the U.S. Securities and Exchange Commission.

Delphi said it expects to circulate an amendment to its DIP lenders to provide additional time to complete the periodic filings.

Delphi, a Troy, Mich.-based automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 05-44481.

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