Freddie Mac 2004 Annual Report Download - page 176

relationships was recorded in Net interest income as a component of Income (expense) related to derivatives.
Therefore, for periods prior to 2003, the impact of the accrual for these periodic derivative cash settlements
has been reclassiÑed from Income (expense) related to derivatives to Derivative gains (losses). The eÅect of
this reclassiÑcation on the company's consolidated statements of income was to increase Net interest income
by $639 million for 2002 and decrease Non-interest income by the same amounts. These reclassiÑcations had
no eÅect on net income.
Recently Issued Accounting Standards
Certain Loans or Debt Securities Acquired in a Transfer Ì In December 2003, the Accounting Standards
Executive Committee of the American Institute of CertiÑed Public Accountants, (""AICPA''), issued
SOP No. 03-3, ""Accounting for Certain Loans or Debt Securities Acquired in a Transfer'' (""SOP 03-3'').
SOP 03-3 addresses the accounting for diÅerences between the contractual cash Öows and the cash Öows
expected to be collected from purchased loans or debt securities if those diÅerences are attributable, in part, to
credit quality. The scope of SOP 03-3 is limited to purchased loans or debt securities with evidence of
deterioration of credit quality since origination acquired by completion of a transfer for which it is probable, at
acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3
requires purchased loans and debt securities to be recorded initially at acquisition cost (typically fair value in
an arms-length purchase). SOP 03-3 is eÅective for certain loans and debt securities acquired after
December 31, 2004. The adoption of SOP 03-3 is not expected to be material to the company's Ñnancial
position or results of operations.
Other-than-Temporary Impairment Ì In September 2004, the FASB voted unanimously to delay certain
portions of EITF 03-1, ""The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments'' (""EITF 03-1''), subject to further consideration. Subsequently, the FASB deferred this
consideration pending resolution of other related matters. The deferral applies to both debt and equity
securities and speciÑcally applies to impairments caused by interest rate and sector spreads. In addition, the
provisions of EITF 03-1 that have been deferred relate to the requirements that a company declare its intent to
hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-
temporary impairment charge through earnings. The FASB may address other-than-temporary impairments
further in a future project. The FASB's actions to defer the impairment measurement consensus did not
change the separate disclosure consensus in EITF 03-1, which remains eÅective. The incremental disclosures
required by EITF 03-1 are included in ""NOTE 5: RETAINED PORTFOLIO AND CASH AND
INVESTMENTS PORTFOLIO.''
Stock-Based Compensation Ì In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
""Share-Based Payment'' (""SFAS 123-R''), which replaces the existing SFAS 123 and supercedes APB 25.
Also, in March 2005, the SEC issued StaÅ Accounting Bulletin No. 107 (""SAB 107'') which provides
additional guidance on the application of SFAS 123-R. SFAS 123-R requires companies to measure and
record compensation expense for stock options and other share-based payments based on the instruments' fair
values. SFAS 123-R is eÅective for interim and annual reporting periods beginning after June 15, 2005. As
noted above in ""Stock-Based Compensation,'' the company has applied the fair value compensation expense
provisions of SFAS 123 retroactively to January 1, 1995. The impact of the adoption of SFAS 123-R is not
expected to be material to the company's Ñnancial position or results of operations.
Implicit Variable Interests Ì In March 2005, the FASB issued FASB StaÅ Position No. FIN 46(R)-5,
""Implicit Variable Interests Under FASB Interpretation No. 46 (Revised December 2003)''
(""FSP FIN 46(R)-5''). FSP FIN 46(R)-5 provides guidance on when an indirect relationship could be
deemed an implicit variable interest that should be considered in assessing whether or not to consolidate
certain entities. Determination as to whether an implicit variable interest exists should be based on whether
the company, through its relationship with the related party, will absorb the variability of the variable interest
entity. FSP FIN 46(R)-5 is eÅective for the company beginning April 1, 2005. The impact of adoption is not
expected to be material to the company's Ñnancial position or results of operations.
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