Fannie Mae 2006 Annual Report Download - page 256

continue to recognize compensation costs for retirement-eligible employees ($2 million in 2006) over the
stated vesting period.
We had previously adopted SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as of
January 1, 2003, using the prospective transition method. Under this standard, we accounted for new and
modified stock-based compensation awards at fair value on the grant date and recognized compensation cost
over the vesting period. However, under the prospective transition method, we continued to account for
unmodified stock options that were outstanding as of December 31, 2002, using the intrinsic value method of
accounting required under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued
to Employees (“APB 25”). Under the intrinsic value method, we did not recognize compensation expense on
such stock-based awards, except for grants deemed to be variable awards.
In accordance with the transition provisions of SFAS 123R, we began to recognize compensation cost
prospectively for the unvested stock options that had previously been accounted for under APB 25. We
measure this compensation cost beginning in 2006 as if we had previously amortized the fair value of the
unvested stock options at the grant date through December 31, 2005, and record compensation cost only for
the remaining unvested portion of each award after January 1, 2006. Additionally, we recognized as “Salaries
and employee benefits” expense in the 2006 consolidated statement of income an immaterial cumulative effect
of a change in accounting principle to estimate forfeitures at the grant date as required by SFAS 123R rather
than recognizing them as incurred. The recognition of this change had no impact on 2006 earnings per share.
SFAS 123R also requires us to classify cash flows resulting from the tax benefit of tax deductions in excess of
their recorded share-based compensation expense as financing cash flows in the consolidated statements of
cash flows rather than within operating cash flows.
Had compensation costs for all awards under our stock-based compensation plans been determined using the
provisions of SFAS 123, our net income available to common stockholders and earnings per share for the
years ended December 31, 2005 and 2004 would have been reduced to the pro forma amounts displayed in the
table below. Following our adoption of SFAS 123R as of January 1, 2006, all awards are recorded at fair
value, thus the following disclosure is not required for periods subsequent to 2005.
2005 2004
For the Year Ended
December 31,
(Dollars in millions,
except per share
amounts)
Net income available to common stockholders, as reported . . . . . . . . . . . . . . . . . . . . . . . . $5,861 $4,802
Plus: Stock-based employee compensation expense included in reported net income, net of
related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 68
Less: Stock-based employee compensation expense determined under fair value based
method, net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) (97)
Pro forma net income available to common stockholders
(1)
. . . . . . . . . . . . . . . . . . . . . . . . $5,848 $4,773
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.04 $ 4.95
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.03 4.92
Diluted—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.01 $ 4.94
Diluted—pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.99 4.91
(1)
In the computation of proforma diluted EPS for 2005, convertible preferred stock dividends of $135 million, are added
back to proforma net income available to common stockholders since the assumed conversion of the preferred shares is
dilutive and assumed to be converted from the beginning of the period.
F-25
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)