Freddie Mac 2009 Annual Report Download - page 190

• For other financial instruments that are recorded in the GAAP consolidated balance sheets at fair value, changes in
fair value are deferred, net of tax, in AOCI. These include:
— mortgage-related and non-mortgage related securities classified as available-for-sale, which are initially
measured at fair value with deferred gains and losses recognized in AOCI. These deferred gains and losses may
affect earnings over time through amortization, sale or impairment recognition; and
— changes in derivatives that were designated in cash flow hedge accounting relationships. The deferred gains and
losses on closed cash flow hedges are reclassified from AOCI and recognized in earnings as the originally
forecasted transactions affect earnings. If it is probable the originally forecasted transaction will not occur, the
associated deferred gain or loss in AOCI is reclassified to earnings immediately.
• Our guarantee obligation is initially recorded at an amount equal to the fair value of compensation received in the
related securitization transaction, but is not remeasured at fair value on a recurring basis. This obligation affects
earnings over time through amortization to income on guarantee obligation.
• Mortgage loans purchased under our financial guarantees result in recognition of losses on loans purchased when the
fair values of the purchased loans are less than our acquisition basis in the loans at the date of purchase.
• Mortgage loans held for sale include single-family and certain multifamily mortgage loans. We carry single-family
mortgage loans held for sale at the lower of cost or fair value. We elected the fair value option for multifamily
mortgage loans held for sale purchased through our Capital Market Execution program and account for these loans at
fair value. Changes in fair value are recorded through earnings in gains (losses) on investments.
• REO is initially recorded at fair value less estimated costs to sell and is subsequently carried at the lower of cost or
fair value. When a loan is transferred to REO, losses are charged-off against the allowance for loan losses at the time
of transfer and gains are recognized immediately in earnings. Subsequent declines in fair value are recorded through
earnings (losses) in REO operations income (expense).
• Our investments in LIHTC partnerships are reported as consolidated entities or equity method investments in the
GAAP financial statements. When equity investments in LIHTC partnerships are determined to be impaired, we write
down the carrying value of these investments to their fair value, and recognize impairment through non-interest
income (loss) — low-income housing tax credit partnerships. Impairment of consolidated LIHTC investments is
recorded to other expenses.
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for
further information.
Fair Value Measurements
The amendment to the accounting standards for fair value measurements and disclosures, which we adopted on
January 1, 2008, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Upon adoption of this amendment, we began estimating
the fair value of our newly issued guarantee obligations at their inception using the practical expedient provided by the
accounting standards for guarantees. Using the practical expedient, the initial guarantee obligation is recorded at an amount
equal to the fair value of compensation received, inclusive of all rights related to the transaction, in exchange for our
guarantee. As a result, subsequent to January 1, 2008, we no longer record estimates of deferred gains or immediate, “day
one” losses on most guarantees. In addition, amortization of the guarantee obligation now more closely follows our
economic release from risk under the guarantee. All unamortized amounts recorded prior to January 1, 2008 continue to be
deferred and amortized using the static effective yield method. Valuation of the guarantee obligation subsequent to initial
recognition uses current pricing assumptions and related inputs. For information regarding our fair value methods and
assumptions, see “NOTE 18: FAIR VALUE DISCLOSURES” to our consolidated financial statements.
Determination of Fair Value
The accounting standards for fair value measurements and disclosures establish a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value based on the inputs a market participant would use at the
measurement date. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect
assumptions based on the best information available under the circumstances. Unobservable inputs are used to measure fair
value to the extent that observable inputs are not available, or in situations where there is little, if any, market activity for an
asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs, where
available, and minimize the use of unobservable inputs.
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