Fannie Mae 2004 Annual Report Download - page 193

It limits the yield that may be accreted as interest income on such loans to the excess of an investor’s estimate
of undiscounted expected principal, interest, and other cash flows from the loan over the investor’s initial
investment in the loan. The amount of yield to be accreted is not displayed in the consolidated balance sheets.
Subsequent increases in estimated future cash flows to be collected are recognized prospectively in interest
income through a yield adjustment over the remaining life of the loan. Decreases in estimated future cash
flows to be collected are recognized as an impairment expense through a valuation allowance. SOP 03-3
applies prospectively to loans acquired in fiscal years beginning after December 15, 2004. Loans carried at fair
value or mortgage loans held for sale are excluded from the scope of SOP 03-3. SOP 03-3 will apply primarily
to delinquent loans that we purchase from MBS trusts in connection with our guaranty as well as to delinquent
loans in MBS trusts or private-label trusts that we consolidate pursuant to FIN 46R. We are evaluating the
effect of the adoption of SOP 03-3 to the consolidated financial statements.
SFAS 123R, Share-Based Payment and SAB No. 107
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), which revises
SFAS No. 123 and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R
eliminates the alternative of applying the intrinsic value measurement provisions of APB 25 to stock
compensation awards issued to employees. Rather, SFAS 123R requires measurement of the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. With respect to options, SFAS 123R requires that they be measured at fair value using an option-
pricing model that takes into account the options’ unique characteristics and recognition of the cost as expense
over the period the employee provides services to earn the award, which is generally the vesting period. Also,
SFAS 123R requires that cash flows resulting from tax deductions in excess of the compensation cost
recognized for those stock incentive awards, also referred to as excess tax benefits, to be classified as
financing activities in the consolidated statements of cash flows.
This standard includes measurement requirements for employee stock options that are similar to those under
the fair-value-based method of SFAS 123; however, SFAS 123R requires initial and ongoing estimates of the
amount of shares that will vest while SFAS 123 provided entities the option of assuming that all shares would
vest and then recognize actual forfeitures as they occur and distinguishment of awards between equity and
liabilities based on guidance in SFAS No. 150, Accounting for Certain Financial Instruments with Character-
istics of both Liabilities and Equity.
Additionally, SEC Staff Accounting Bulletin No. 107, Share-Based Payment, provides guidance related to the
interaction between SFAS 123R and certain SEC rules and regulations, as well as the staff’s views regarding
the valuation of share-based payment arrangements.
SFAS 123R is effective for annual periods beginning after June 15, 2005 and requires use of the modified
prospective application method to be applied to new awards, unvested awards and to awards modified,
repurchased, or cancelled after the effective date. We prospectively adopted the fair value expense recognition
provisions of SFAS 123 effective January 1, 2003, using a model to estimate the fair value of the majority of
our stock awards. We adopted SFAS 123R effective January 1, 2006 with no material impact to the
consolidated financial statements.
SFAS 154, Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces
APB Opinion No. 20, Accounting Changes (“APB 20”) and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle and changes
required by an accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions.
APB 20 requires that the cumulative effect of most voluntary changes in accounting principles be included in
net income in the period of adoption. The new statement requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle, unless it is impracticable to determine
either period-specific effects or the cumulative effect of the change. In addition, SFAS 154 requires that we
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