Fannie Mae 2006 Annual Report Download - page 258

dilutive effect of common stock equivalents such as convertible securities, stock options and other
performance awards. These common stock equivalents are excluded from the calculation of diluted EPS when
the effect of inclusion, assessed individually, would be anti-dilutive.
Other Comprehensive Income
Other comprehensive income is the change in equity, net of tax, resulting from transactions that are recorded
directly to stockholders’ equity. These transactions include unrealized gains and losses on AFS securities and
certain commitments whose underlying securities are classified as AFS, unrealized gains and losses on
guaranty assets resulting from portfolio transactions and buy-ups resulting from lender swap transactions and
deferred hedging gains and losses from cash flow hedges entered into prior to our adoption of SFAS 133 and
changes in our minimum pension liability.
Fair Value Measurements
We estimate fair value as the amount at which an asset could be bought or sold, or a liability could be
incurred or settled, in a current transaction between willing unrelated parties, other than in a forced or
liquidation sale. If a quoted market price is available, the fair value is the product of the number of trading
units multiplied by that market price. If a quoted market price is not available, the estimate of fair value
considers prices for similar assets or similar liabilities and the results of valuation techniques to the extent
available in the circumstances. Valuation techniques incorporate assumptions that market participants would
use in their estimates of values.
Reclassifications
Certain prior year amounts previously recorded as a component of “Guaranty fee income” in the consolidated
statements of income as well as changes in the guaranty asset and obligation in the consolidated statements of
cash flows have been reclassified as “Losses on certain guaranty contracts” to conform to current year
presentation.
New Accounting Pronouncements
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments and DIG Issue No. B40, Embedded
Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments
(“SFAS 155”), an amendment of SFAS 133 and SFAS 140. This statement: (i) clarifies which interest-only
strips and principal-only strips are not subject to SFAS 133; (ii) establishes a requirement to evaluate interests
in securitized financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that
concentration of credit risks in the form of subordination are not embedded derivatives; and (iv) permits fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation.
In January 2007, FASB issued Derivatives Implementation Group (“DIG”) Issue No. B40 (“DIG B40”). The
objective of DIG B40 is to provide a narrow scope exception to certain provisions of SFAS 133 for securitized
interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying
financial assets. SFAS 155 and DIG B40 are effective for all financial instruments acquired or issued after the
beginning of the first fiscal year that begins after September 15, 2006. We adopted SFAS 155 effective
January 1, 2007 and elected fair value measurement for hybrid financial instruments that contain embedded
derivatives that otherwise require bifurcation, which includes buy-ups and guaranty assets arising from
portfolio securitization transactions. We also elected to classify investment securities that may contain
embedded derivatives as trading securities under SFAS 115. SFAS 155 is a prospective standard and had no
impact on the consolidated financial statements on the date of adoption.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)