Freddie Mac 2004 Annual Report Download - page 174

contemplated in the fair value estimate by using a dividend yield of zero as a Black-Scholes model input.
Accordingly, compensation expense for these dividend-equivalents is recognized through amortization expense
recognition. For restricted stock and RSUs, the value of the dividend-equivalents is reÖected in the market
price of a share of common stock. The fair value of restricted stock and RSUs on the grant date is recognized
as compensation expense over the vesting period.
Incremental compensation expense related to modiÑcation of awards is based on a comparison of the fair
value of the modiÑed award with the fair value of the original award before modiÑcation (measured using the
shorter of the remaining or revised term). Furthermore, the company generally expects to settle its stock-
based compensation awards in shares. In the limited cases in which an award may be cash-settled only in the
event of a contingency such as involuntary termination, Freddie Mac accounts for the award as an equity
award until the contingency becomes probable, when liability accounting is triggered. Under SFAS 123,
liabilities are initially measured at intrinsic value with changes in intrinsic value recognized as earnings.
For stock-based compensation granted prior to 1995, Freddie Mac continues to apply the provisions of
Accounting Principles Board Opinion (""APB'') No. 25, ""Accounting for Stock Issued to Employees''
(""APB 25''). Under APB 25, typically no compensation expense is recorded if the option exercise price is
equal to the market price of the stock on the date of grant. Freddie Mac recognized compensation expense for
restricted stock grants and dividend-equivalent rights associated with stock options. Furthermore, no
compensation expense was recognized for the ESPP since it is a qualifying plan under tax regulations.
Earnings Per Common Share
Basic earnings per common share is computed as net income available to common stockholders divided
by the weighted average common shares outstanding for the period. Diluted earnings per common share is
determined using the weighted average number of common shares during the period, adjusted for the dilutive
eÅect of common stock equivalents. Dilutive common stock equivalents reÖect the assumed issuance of
additional common shares pursuant to certain of the company's stock-based compensation plans that could
potentially reduce or ""dilute'' earnings per share, based on the treasury stock method as deÑned in
SFAS No. 128, ""Earnings per Share'' (""SFAS 128'').
Comprehensive Income
Comprehensive income, as deÑned in SFAS No. 130, ""Reporting Comprehensive Income''
(""SFAS 130''), is the change in equity, on a net of tax basis, resulting from transactions and other events and
circumstances from non-owner sources during a period. It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners. For Freddie Mac, comprehen-
sive income is composed of net income plus changes in the unrealized gains and losses on available-for-sale
securities, the eÅective portion of derivatives accounted for as cash Öow hedge relationships, and changes in
the minimum pension liability.
Reportable Segments
Freddie Mac has one business segment for Ñnancial reporting purposes because the company did not
meet the criteria for reporting business segments that are prescribed in SFAS No. 131, ""Disclosures About
Segments of an Enterprise and Related Information'' (""SFAS 131''), for any period presented in the
consolidated Ñnancial statements.
Recently Adopted Accounting Standards and Accounting Changes
Consolidation of Variable Interest Entities Ì In January 2003, the FASB issued FIN 46. FIN 46
provides guidance for determining when a company must consolidate the assets, liabilities and activities of a
variable interest entity. In addition, various disclosures are required about variable interest entities when an
entity is not the primary beneÑciary but holds a ""signiÑcant variable interest'' in a variable interest entity.
In December 2003, the FASB released FIN 46-R. The revision captured much of the guidance to date
that had been provided by the FASB for implementation of FIN 46, clariÑed FIN 46 and revised certain
eÅective dates for implementation. Freddie Mac adopted FIN 46-R for 2003. The implementation had no
eÅect on the company's consolidated Ñnancial statements in 2004 or 2003. In 2004, the company determined
that Ñve low-income housing tax credit partnerships, West*Mac Associates Limited Partnership
(""West*Mac''), the owner and developer of the company's headquarters, and a reinsurance company should
be consolidated pursuant to the requirements of FIN 46-R. Prior to 2004, Freddie Mac consolidated these
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