Freddie Mac 2009 Annual Report Download - page 225

On April 1, 2009, we prospectively adopted an amendment to the accounting standards for investments in debt and
equity securities, which provides additional guidance in accounting for and presenting impairment losses on debt securities.
See “Recently Adopted Accounting Standards — Change in the Impairment Model for Debt Securities” for further
information regarding this amendment.
We conduct quarterly reviews to identify and evaluate each available-for-sale security that has an unrealized loss, in
accordance with the amendment to the accounting standards for investments in debt and equity securities. An unrealized loss
exists when the current fair value of an individual security is less than its amortized cost basis. The evaluation of unrealized
losses on our available-for-sale portfolio for other-than-temporary impairment contemplates numerous factors. We perform an
evaluation on a security-by-security basis considering all available information. For available-for-sale securities, a critical
component of the evaluation for other-than-temporary impairments is the identification of credit-impaired securities, where
we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. Our analysis
regarding credit quality is refined where the current fair value or other characteristics of the security warrant. The relative
importance of this information varies based on the facts and circumstances surrounding each security, as well as the
economic environment at the time of assessment. See “NOTE 6: INVESTMENTS IN SECURITIES — Evaluation of Other-
Than-Temporary Impairments” for a discussion of important factors we considered in our evaluation.
The amount of the total other-than-temporary impairment related to a credit-related loss is recognized in net impairment
of available-for-sale securities in our consolidated statements of operations. Unrealized losses on available-for-sale securities
that are determined to be temporary in nature are recorded, net of tax, in AOCI.
For available-for-sale securities that are not deemed to be credit impaired, we perform additional analysis to assess
whether we intend to sell or would more likely than not be required to sell the security before the expected recovery of the
amortized cost basis. In most cases, we asserted that we have no intent to sell and that we believe it is not more likely than
not that we will be required to sell the security before recovery of its amortized cost basis. Where such an assertion has not
been made, the security’s decline in fair value is deemed to be other than temporary and is recorded in earnings.
Prior to January 1, 2008, for certain securities that (a) can contractually be prepaid or otherwise settled in such a way
that we may not recover substantially all of our recorded investment or (b) are not of high credit quality at the acquisition
date, other-than-temporary impairment was defined in accordance with the accounting standards for investments in beneficial
interests in securitized financial assets as occurring whenever there was an adverse change in estimated future cash flows
coupled with a decline in fair value below the amortized cost basis. When a security was deemed to be other-than-
temporarily impaired, the cost basis of the security was written down to fair value, with the loss recorded to gains (losses)
on investment activity. Based on the new cost basis, the deferred amounts related to the impaired security were amortized
over the security’s remaining life in a manner consistent with the amount and timing of the future estimated cash flows. The
security cost basis was not changed for subsequent recoveries in fair value.
On January 1, 2008, for available-for-sale securities identified as within the scope of the accounting standards for
investments in beneficial interests in securitized financial assets, we elected the fair value option to better reflect the
valuation changes that occur subsequent to impairment write-downs recorded on these instruments. By electing the fair value
option for these instruments, we reflect valuation changes through our consolidated statements of operations in the period
they occur, including increases in value. For additional information on our election of the fair value option, see “Recently
Adopted Accounting Standards” and “NOTE 18: FAIR VALUE DISCLOSURES.”
Gains and losses on the sale of securities are included in other gains (losses) on investments, including those gains
(losses) reclassified into earnings from AOCI. We use the specific identification method for determining the cost of a
security in computing the gain or loss.
Repurchase and Resale Agreements
We enter into repurchase and resale agreements primarily as an investor or to finance our security positions. Such
transactions are accounted for as secured financings when the transferor does not relinquish control.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either short-term (due within one year)
or long-term (due after one year), based on their remaining contractual maturity. The classification of interest expense on
debt securities as either short-term or long-term is based on the original contractual maturity of the debt security.
Debt securities other than foreign-currency denominated debt are reported at amortized cost. Deferred items including
premiums, discounts, and hedging-related basis adjustments are reported as a component of debt securities, net. Issuance
costs are reported as a component of other assets. These items are amortized and reported through interest expense using the
effective interest method over the contractual life of the related indebtedness. Amortization of premiums, discounts and
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