Fannie Mae 2006 Annual Report Download - page 104

The non-GAAP estimated fair value of our net assets (net of tax effect) is derived from our non-GAAP fair
value balance sheet. This measure is not a defined term within GAAP and may not be comparable to similarly
titled measures reported by other companies. The estimated fair value of our net assets (net of tax effect)
presented in the non-GAAP supplemental consolidated fair value balance sheets is not intended as a substitute
for amounts reported in our consolidated financial statements prepared in accordance with GAAP. We believe,
however, that the non-GAAP supplemental consolidated fair value balance sheets and the fair value of our net
assets, when used in conjunction with our consolidated financial statements prepared in accordance with
GAAP, can serve as valuable incremental tools for investors to assess changes in our overall value over time
relative to changes in market conditions. In addition, we believe that the non-GAAP supplemental
consolidated fair value balance sheets are useful to investors because they provide consistency in the
measurement and reporting of all of our assets and liabilities. Management, particularly our Capital Markets
group, uses this information to gain a clearer picture of changes in our assets and liabilities from period to
period, to understand how the overall value of the company is changing from period to period and to measure
the performance of our Capital Markets investment activities.
Cautionary Language Relating to Supplemental Non-GAAP Financial Measures
In reviewing our non-GAAP supplemental consolidated fair value balance sheets, there are a number of
important factors and limitations to consider. The estimated fair value of our net assets is calculated as of a
particular point in time based on our existing assets and liabilities and does not incorporate other factors that
may have a significant impact on that value, most notably any value from future business activities in which
we expect to engage. As a result, the estimated fair value of our net assets presented in our non-GAAP
supplemental consolidated fair value balance sheets does not represent an estimate of our net realizable value,
liquidation value or our market value as a whole. Amounts we ultimately realize from the disposition of assets
or settlement of liabilities may vary significantly from the estimated fair values presented in our non-GAAP
supplemental consolidated fair value balance sheets. Because temporary changes in market conditions can
substantially affect the fair value of our net assets, we do not believe that short-term fluctuations in the fair
value of our net assets attributable to mortgage-to-debt OAS or changes in the fair value of our net guaranty
assets are necessarily representative of the effectiveness of our investment strategy or the long-term underlying
value of our business. We believe the long-term value of our business depends primarily on our ability to
acquire new assets and funding at attractive prices and to effectively manage the risks of these assets and
liabilities over time. However, we believe that focusing on the factors that affect near-term changes in the
estimated fair value of our net assets helps us evaluate our long-term value and assess whether temporary
market factors have caused our net assets to become overvalued or undervalued relative to the level of risk and
expected long-term fundamentals of our business.
In addition, as discussed in “Critical Accounting Policies and Estimates—Fair Value of Financial Instruments,”
when quoted market prices or observable market data are not available, we rely on internally developed
models that may require management judgment and assumptions to estimate fair value. Differences in
assumptions used in our models could result in significant changes in our estimates of fair value.
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