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Discover Financial Services: Navigating Accounting Challenges and Merger

2024-11-25

RIVERWOODS, Ill., November 25, 2024 – (BUSINESS WIRE) – In a significant development, Discover Financial Services (NYSE: DFS) has faced accounting issues and a merger agreement. On November 19, 2024, the company received a notice from the NYSE stating its non-compliance with certain regulations due to the late filing of its Quarterly Report on Form 10-Q. This incident has raised concerns and implications for the company.

Accounting Challenges and Their Impact

Back in 2023, the company disclosed a card product misclassification starting around mid-2007. A liability of $365 million was recognized, which was accounted for as an error correction. Although it didn't require restating previously issued financial statements, it was deemed material to certain periods. Later, in 2024, the liability was increased to $1.2 billion to reflect expected disbursements. The Staff of the SEC provided comments on the accounting approach, and the company engaged in discussions. Eventually, the Audit Committee concluded that the prior financial statements should be restated to reflect an alternative approach. This led to a reallocation of the liability increase and the identification of additional overcharges. As a result, the restated financial statements are expected to show significant changes. As of December 31, 2023, there will be an increase in assets of $190 million, an increase in accrued expenses and other liabilities of $783 million, and a decrease in retained earnings of $593 million. For the years ended December 31, 2023 and 2022, pre-tax income will be reduced. For the third quarter of 2024, pre-tax income will decrease, while for the nine months ended September 30, 2024, it will increase.

Details of the Restatement

Approximately $600 million of the liability increase will be reallocated from other expense in the fiscal quarter ended March 31, 2024, to a revenue error correction in prior periods. Additionally, $124 million representing interest will be reallocated to the third and fourth quarters of 2023. Cumulative historical earnings, capital, and the counterparty restitution liability will remain unchanged. These adjustments are crucial in presenting a more accurate financial picture.

Impact on Financial Statements

The restated financial statements will have a profound impact on the company's financial position. It shows the complexity of accounting issues and the need for accurate reporting. The changes highlight the importance of proper classification and recognition of financial transactions.

Merger and Its Implications

In February 2024, Discover and Capital One Financial Corporation entered into a merger agreement. Capital One has filed the Registration Statement with the SEC to register the shares to be issued. Investors and security holders are urged to read the relevant documents carefully as they contain important information. The merger process involves various steps and considerations, and the company is working towards its completion.

Forward-Looking Statements and Risks

This communication contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the expectations. Factors such as the final impact of the restatements, internal control effectiveness, and other risks discussed in the company's reports can affect the future. Investors are cautioned not to rely overly on these forward-looking statements.

Participation in Solicitation

The company and its directors and executive officers may be participants in the solicitation of proxies. Information about them will be included in the joint proxy statement/prospectus. Investors should be aware of these details when making decisions.Discover Financial Services is a digital banking and payment services company with a recognized brand. It offers various financial products and operates global networks. For more information, visit www.discover.com/company.The company is working expeditiously to file the restated financial statements and complete the merger process. There is no certainty about the actual timing, but efforts are being made to ensure a smooth transition.