(a) On May 10, 2011, The First Marblehead Corporation (the "Corporation") announced that its board of directors (the "Board of Directors"), in consultation with management, the audit committee of the Board of Directors (the "Audit Committee") and KPMG LLP, the Corporation’s independent registered public accounting firm, concluded that certain unaudited financial statements previously issued by the Corporation should no longer be relied upon.
In order to correct errors in the recording of certain non-cash items, as described below, the Corporation will restate the unaudited financial statements contained in the Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010 (the "Q1 Form 10-Q") and the Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2010 (the "Q2 Form 10-Q"). The Corporation expects to file the restated Q1 Form 10-Q and the restated Q2 Form 10-Q, as well as the Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the "Q3 Form 10-Q"), no later than May 16, 2011.
Non-Controlling Interest Accounting
Effective July 1, 2010, the Corporation adopted Accounting Standards Update ("ASU") 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets ("ASU 2009-16"), and ASU 2009-17, Consolidation (Topic 810)—Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities ("ASU 2009-17"). As a result, the Corporation consolidated 14 securitization trusts that were previously accounted for off-balance sheet.
The Corporation does not own any of the residual interests in 11 of the consolidated trusts (the "NCSLT Trusts"). Under ASU 2009-17, the Corporation is nonetheless required to consolidate the NCSLT Trusts as a result of its additional structural advisory fee receivables from the NCSLT Trusts and its services provided to the NCSLT Trusts related to default prevention and collections management.
In the Q1 Form 10-Q and the Q2 Form 10-Q, the Corporation, in consultation with KPMG LLP, presented the equity interests in the NCSLT Trusts as “non-controlling interests” in the Corporation’s balance sheets, as a separate component of stockholders’ equity. In addition, in its statements of operations, the Corporation allocated the net losses generated by the NCSLT Trusts to non-controlling interests. The net losses of the NCSLT Trusts did not, therefore, directly impact the net loss, loss per share or equity available to the Corporation’s stockholders.
On May 9, 2011, KPMG LLP reported to the Board of Directors and the Audit Committee that the Corporation’s allocations to non-controlling interests are not consistent with U.S. generally accepted accounting principles ("GAAP"). Instead, under GAAP the NCSLT Trusts' asset performance should be allocated to the Corporation until the trusts are deconsolidated or trust liabilities are extinguished.
As a result, the Board of Directors has determined that the Corporation will restate the unaudited financial statements contained in the Q1 Form 10-Q and the Q2 Form 10-Q, to eliminate the allocation of losses generated by the NCSLT Trusts to non-controlling interests in the Corporation’s statements of operations. The Corporation’s restated financial results will include the loss from the NCSLT Trusts in the Corporation’s net loss, net loss per share and retained earnings. The Corporation’s balance sheets as of September 30, 2010 and December 31, 2010 will reflect in retained earnings, rather than as a separate component of stockholders’ equity, the deficit generated by the NCSLT Trusts, although the Corporation has no obligation to fund such deficit. The Corporation also intends to amend its Current Report on Form 8-K filed on March 16, 2011, which filed an audited consolidated balance sheet of the Corporation as of July 1, 2010, to reflect this revised presentation.
The Corporation expects to include in the Q3 Form 10-Q and in subsequent periodic filings certain non-GAAP financial metrics that will have the effect of excluding the results of the NCSLT Trusts from the Corporation’s net income or loss, net income or loss per share and retained earnings or accumulated deficit. Although accounting standards require that the assets and liabilities of the NCSLT Trusts be included in the Corporation’s balance sheets, the NCSLT Trusts have been structured to provide recourse only to the assets of that particular securitization trust and not to the assets of the Corporation, its subsidiaries or any other securitization trust. In addition, although accounting standards require that the net losses or income of the NCSLT Trusts be included in the Corporation’s statements of operations, the Corporation’s rights to receive income generated by the NCSLT Trusts are limited to the collection of fees for services provided. Accordingly, the Corporation believes that providing this non-GAAP information will assist investors in evaluating the financial and operating performance of the Corporation.
