Freddie Mac 2006 Annual Report Download - page 159

For fair value balance sheet purposes, the Guarantee asset is reÖected for all PCs and Structured Securities held by
third parties and is valued using the same method as used for GAAP fair value purposes. For a description of how we
determine the fair value of our Guarantee asset, see ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN
MORTGAGE-RELATED ASSETS.''
Other assets
Other assets consists of accrued interest and other receivables, investments in qualiÑed LIHTC partnerships that are
eligible for federal tax credits, credit enhancement contracts related to PCs and Structured Securities (pool insurance and
recourse and/or indemniÑcation agreements), Ñnancial guarantee contracts for additional credit enhancements on certain
manufactured housing asset-backed securities, REO, property and equipment, and other miscellaneous assets.
The receivables are Ñnancial instruments and are required to be measured at fair value for disclosure purposes pursuant
to SFAS 107. Because these receivables are short-term in nature, we believe the carrying amount on our GAAP
consolidated balance sheets is a reasonable approximation of their fair values. Our investments in LIHTC partnerships,
reported as consolidated entities or equity method investments in the GAAP Ñnancial statements, are not within the scope of
SFAS 107 disclosure requirements. However, we present the fair value of these investments in Other assets. For the
LIHTC partnerships, the fair value of expected tax beneÑts is estimated using expected cash Öows discounted at a market-
based yield.
For the credit enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or
indemniÑcation agreements), fair value is estimated using an expected cash Öow approach, and is intended to reÖect the
estimated amount that a third party would be willing to pay for the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet date based on current market conditions. On our GAAP
consolidated balance sheets, these contracts are initially recorded at fair value at inception, then amortized to expense.
For the credit enhancements on manufactured housing asset-backed securities, the fair value is based on the diÅerence
between the market price of non-credit-impaired manufactured housing securities and credit-impaired manufactured
housing securities that are likely to produce future credit losses, as adjusted for our estimate of a risk premium attributable
to the Ñnancial guarantee contracts. The value of the contracts, over time, will be determined by the actual credit-related
losses incurred and, therefore, may have a value that is higher or lower than our market-based estimate. On our GAAP
consolidated Ñnancial statements, these contracts are recognized as realized.
The other categories of assets that comprise Other assets are not Ñnancial instruments required to be valued at fair value
under SFAS 107, such as REO and property and equipment. For the majority of these non-Ñnancial assets in Other assets,
we use the carrying amounts from our GAAP consolidated balance sheets as the reported values on our consolidated fair
value balance sheets, without any adjustment. These assets represent an insigniÑcant portion of our GAAP consolidated
balance sheets, and any change in their fair value would not be a meaningful part of our fair value of net assets business
results. Certain non-Ñnancial assets in Other assets on our GAAP consolidated balance sheets are assigned a zero value on
our consolidated fair value balance sheets. This treatment is applied to deferred items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes reÖected on our consolidated fair value balance sheets to include estimated
income taxes on the diÅerence between our consolidated fair value balance sheets net assets, including deferred taxes from
our GAAP consolidated balance sheets, and our GAAP consolidated balance sheets equity attributable to common
stockholders. To the extent the adjusted deferred taxes are a net asset, this amount is included in Other assets. If the
adjusted deferred taxes are a net liability, this amount is included in Other liabilities.
Total debt securities, net
Total debt securities, net represents short-term and long-term debt used to Ñnance our assets and, on our consolidated
GAAP balance sheets, debt securities are reported at amortized cost, which is net of deferred items, including premiums,
discounts and hedging-related basis adjustments. This item includes both non-callable and callable debt as well as short-
term zero-coupon discount notes. The fair value of the short-term zero-coupon discount notes is based on a discounted cash
Öow model with market inputs. The valuation of other debt securities is generally based on market prices obtained from
broker/dealers, reliable third-party pricing service providers or direct market observations.
Guarantee obligation
We did not establish a Guarantee obligation for GAAP purposes for PCs and Structured Securities held by third parties
that were issued through our Guarantor Swap program prior to adoption of FIN 45. In addition, after it is initially recorded
at fair value the Guarantee obligation is not subsequently carried at fair value for GAAP purposes. On our consolidated fair
value balance sheets, the Guarantee obligation reÖects the fair value of our Guarantee obligation on all PCs held by third
parties. Additionally, for fair value balance sheet purposes, the Guarantee obligation is valued using the same method as used
for GAAP to determine its initial fair value. Because Guarantee asset, Guarantee obligation and credit enhancement-related
147 Freddie Mac