Fannie Mae 2006 Annual Report Download - page 255

Securities”). We receive a one-time conversion fee upon issuance of a Structured Security that varies based on
the value of securities issued and the transaction structure. The conversion fee compensates us for all services
we provide in connection with the Structured Security, including services provided at and prior to security
issuance and over the life of the Structured Securities. Except for Structured Securities where the underlying
collateral is whole loans or private-label securities, we generally do not receive a guaranty fee as
compensation in connection with the issuance of a Structured Security because the transferred mortgage-
related securities have previously been guaranteed by us or another party.
We defer a portion of the fee received upon issuance of a Structured Security based on our estimate of the fair
value of our future administration services in accordance with EITF No. 00-21, Revenue Arrangements with
Multiple Deliverables. The deferred revenue is amortized on a straight-line basis over the expected life of the
Structured Security. The excess of the total fee over the fair value of the future services is recognized in the
consolidated statements of income upon issuance of a Structured Security. However, when we acquire a
portion of a Structured Security contemporaneous with our structuring of the transaction, we defer and
amortize a portion of this upfront fee as an adjustment to the yield of the purchased security pursuant to
SFAS 91. Fees received and costs incurred related to our structuring of securities are presented in “Fee and
other income” in the consolidated statements of income.
Income Taxes
We recognize deferred income tax assets and liabilities for the difference in the basis of assets and liabilities
for financial accounting and tax purposes pursuant to SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”). Deferred tax assets and liabilities are measured using enacted tax rates that are expected to be
applicable to the taxable income or deductions in the period(s) the assets are realized or the liabilities are
settled. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. We recognize investment and other tax credits through our effective tax rate
calculation assuming that we will be able to realize the full benefit of the credits. SFAS 109 also requires that
a deferred tax asset be reduced by an allowance if, based on the weight of available positive and negative
evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
Our tax reserves are based on significant estimates and assumptions as to the relative filing positions and
potential audit and litigation exposures related thereto. We establish these reserves based upon management’s
assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to
temporary differences when a potential loss is probable and reasonably estimated. We continually analyze tax
reserves and record adjustments as events occur that warrant adjustment to the reserves. In 2007, we adopted
FIN No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). Refer to New Accounting
Pronouncements section of this note for impact to our consolidated financial statements.
Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123 (Revised), Share-Based Payments (“SFAS 123R”), and
the related FASB Staff Positions (“FSP”) that provide implementation guidance, using the modified
prospective method of transition. We also made the transition election provided by FSP SFAS 123R-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. Accordingly,
prior period amounts have not been restated. In accordance with this statement, we measure the cost of
employee services received in exchange for stock-based awards using the fair value of those awards on the
grant date.
We recognize compensation cost over the period during which an employee is required to provide service in
exchange for a stock-based award, which is generally the vesting period. For awards issued on or after
January 1, 2006, we recognize compensation cost for those employees who are nearing retirement, over the
shorter of the vesting period or the period from the grant date to the date of retirement eligibility and for
retirement-eligible employees, immediately. For grants issued prior to the adoption of SFAS 123R, we will
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)