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MARYLAND
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1-7797
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52-0551284
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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We
have reevaluated the appropriateness of including a portion of mortgage
reinsurance premiums as a component of the cash flows of our mortgage
servicing rights (“MSRs”). Prior to the second quarter of 2003, we
capitalized the estimated future cash flows related to mortgage
reinsurance premiums as part of our MSRs. We ceased capitalizing
new
mortgage reinsurance premiums in the second quarter of 2003 and the
balance of previously capitalized mortgage reinsurance premiums was
fully
amortized as of the end of the first quarter of 2005. We will change
this
accounting treatment, which we expect will impact only the timing
of
revenue recognition. We expect this change will result in decreases
in
pre-tax income of approximately $108 million in years prior to 2001
and $5
million in 2001, and offsetting increases in pre-tax income of
approximately $13 million in 2002, $71 million in 2003, $27 million
in
2004 and $2 million in the nine months ended September 30,
2005.
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The
reevaluation
of available documentation required to employ Statement on Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” as amended (“SFAS 133”) hedge accounting for certain
derivative financial instruments used to hedge interest rate risk
for the
years 2001 through 2005. This reevaluation and errors in applying
other
requirements of SFAS 133 will result in the disallowance of hedge
accounting previously used for these hedging arrangements. We expect
the
net impact will result in increases in pre-tax income of approximately
$8
million in 2001 and $3 million in 2002, and decreases in pre-tax
income of
approximately $4 million in 2003 and $1 million in 2004, and an increase
in pre-tax income of approximately $2 million in the nine months
ended
September 30, 2005.
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The
reevaluation of the timing of recognition of motor company monies
that
impact the basis in our leased vehicles and depreciation methodologies
applied to certain of our leased vehicles, which we expect will result
in
changes to our depreciation expense. We expect the aggregate impact
of
this reevaluation will result in net decreases to pre-tax income
of
approximately $10 million in years prior to 2001, $2 million in 2001
and
$1 million in 2002, partially offset by net increases to pre-tax
income of
approximately $1 million in 2003, $6 million in 2004, and $2 million
in the nine months ended September 30, 2005.
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The
appropriateness of recording a tax expense in the first quarter of
2005
associated with the Spin-Off relating to a tax liability we incurred
associated with our distribution of Speedy Title & Appraisal Review
Services, LLC (“STARS”) to Cendant in 2002. We believe this liability
should have been recorded in 2002 as an equity adjustment associated
with
the distribution of STARS to Cendant. We expect that this adjustment
will
reduce tax expense in the first quarter of 2005 by approximately
$24
million, but have no net impact on
equity.
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The
appropriateness of not recording certain amounts relating to an audit
by
the Canadian tax authorities of the goods and service tax, which
was
resolved resulting in additional taxes, interest and penalties of
approximately $2 million
to be recorded in the fourth quarter of
2005.
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The
reevaluation of $21 million of certain intangibles related to trademarks
and customer lists in connection with the goodwill reallocation recorded
at the time of the Spin-Off and the resulting goodwill impairment
previously recorded in the first quarter of 2005. Of the total $21
million
amount, we believe that there will be no change to $16 million previously
recorded as trademarks, however, we believe that the $5 million previously
recorded as customer lists should have been reallocated to goodwill
as
part of an acquisition in 2001 and will be resolved with the $239
million
goodwill impairment matter.
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We
determined that depreciation expense of our Fleet Management Services
segment will not be deducted from our reported gross revenues when
reporting net revenues. This reclassification has no impact on our
net
income for any period and relates to financial statement presentation
only. We expect that the correction of this error will increase our
reported net revenues by approximately $0.8 billion in 2001, $1.0
billion
in 2002, $1.1 billion in 2003, $1.1 billion in 2004 and $0.9 billion
in
the nine months ended September 30, 2005, with a corresponding increase
in
expenses by the same amount in each
period.
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We
have historically reported our business operations and financial
statements in two operating segments, a Mortgage Services segment
and
Fleet Management Services segment. In conjunction with the preparation
of
our fourth quarter 2005 financial statements, we have determined
that our
business operations and financial statements will be reported in
three
operating segments: a Mortgage Production segment, a Mortgage Servicing
segment and a Fleet Management Services segment. As
a result of this change in segments, the financial information as
previously-reported in our Mortgage Services segment and appearing
in our
2005 Form 10-K and subsequent SEC filings will reflect the separation
of
our Mortgage Services segment into a Mortgage Production segment
and a
Mortgage Servicing segment.
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The
appropriateness of not recording federal income tax reserves and
valuation
allowances associated with the amended and restated tax sharing agreement
dated as of December 21, 2005 with Cendant post Spin-Off, which may
result
in the creation of a reserve and/or valuation allowance and a charge
to
our 2005 net income. This analysis requires an in-depth examination
of the
tax accounting methodologies previously utilized with respect to
a wide
range of financial instruments we use in the ordinary course of business,
including the tax classification of derivatives, hedges and swaps.
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The
$239 million goodwill impairment recorded in the first quarter of
2005 as
a result of the Spin-Off. Based on our review of this issue to date,
it
appears that the amount of goodwill allocated to us was improper
and will
need to be decreased resulting in a reduction in the impairment write-off
recorded in the first quarter of
2005.
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The appropriateness
of the timing of revenue recognition related to loan sales from PHH
Mortgage Corporation, our wholly-owned subsidiary, to Bishops Gate
Residential Mortgage Trust (“Bishop’s Gate”), a consolidated special
purpose entity, prior to the adoption of Financial Accounting Standards
Board Interpretation No. 46, “Consolidation of Variable Interest
Entities,” as amended (“FIN 46”). Prior to the date of adoption of FIN 46
in the second quarter of 2003 and the related consolidation of Bishop’s
Gate, we recorded loan sales to Bishop’s Gate at the time of the sale;
however, the gain on sale was deferred until we completed our obligation
to assist Bishop’s Gate in selling those loans to third-party investors.
The restatement will correct this error by recognizing the gain on
sale at
the time of our sale to Bishop’s Gate for the periods prior to Bishop’s
Gate’s consolidation in 2003. We expect the impact of this matter will
result in an increase in pre-tax income of approximately $17 million
in
years prior to 2001, a decrease in pre-tax income of approximately
$1
million in 2001, and increases in pre-tax income of approximately
$28
million in 2002 and $16 million in 2003. This change in accounting
treatment will have no impact on pre-tax income after 2003. After
correcting this error for the periods prior to adoption of FIN 46
in 2003,
we will record in the 2003 income statement the cumulative effect
of
adopting FIN 46 and therefore consolidating Bishop’s Gate. Upon adoption
of FIN 46, revenue and gain on sale previously recognized on loans
sold by
PHH Mortgage Corporation to Bishop’s Gate, but not yet sold to third-party
investors, could not be recognized. We expect that the impact of
reversing
the revenue and gain on sale recognized for those loans will result
in a
decrease in income ($60 million pre-tax) and will be reflected in
the
income statement as the cumulative effect of adopting FIN 46. After
adoption of FIN 46, revenue and gain on sale are recognized upon
sale of
loans by Bishop’s Gate to third-party
investors.
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We
significantly strengthened our executive management ranks during
the first
quarter of 2006, including the appointment of a new Chief Financial
Officer. We
have added resources to our finance, tax and accounting staff and
are
actively recruiting other staff with financial reporting and internal
control expertise. We have also engaged outside consultants to augment
these areas and provide internal control expertise. We expect to
add an
adequate number of experienced finance and accounting personnel to
eliminate the delays in financial statement preparation and other
issues
that have occurred in the past. In addition, training of the finance
and
accounting staff will be formalized and enhanced during the remainder
of
2006. We engaged a firm to serve as our internal audit co-source
provider
for 2006.
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In
the third quarter of 2006, we engaged a firm to lead our SOX readiness
efforts for 2006 and assist us with our assessment of the effectiveness
of
internal control over financial reporting for 2005. Management also
formed
a SOX Steering Committee to oversee the remainder of our 2005 SOX
assessment and to implement and oversee the 2006 SOX assessment process.
The committee meets regularly to review significant findings and
resolve
issues. Our SOX team also reports progress and summary results to
the
Audit Committee on a regular basis. Also in the third quarter, we
initiated periodic communications from executive management regarding
the
importance of adherence to internal controls and company policies
and are
implementing a series of internal control training programs to reach
all
employees beginning in the fourth quarter of
2006.
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Throughout
2006
we focused resources on financial restatement items and related journal
entries and we are enhancing our accounting policies and procedures
for
each of our businesses.
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We
will begin the process of revising and implementing other policies
and
procedures in the fourth quarter of 2006. Management will also begin
designing controls to ensure compliance with these enhanced policies
and
procedures in key areas, including taxes, contract administration
and
accounting for derivatives.
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PHH
CORPORATION
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By:
/s/
Clair M. Raubenstine
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Name:
Clair
M. Raubenstine
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Title:
Executive
Vice President and Chief Financial Officer
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Dated:
September 28, 2006
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