Freddie Mac 2009 Annual Report Download - page 226

issuance costs begins at the time of debt issuance. Amortization of hedging-related basis adjustments is initiated upon the
termination of the related hedge relationship.
On January 1, 2008, we elected the fair value option on foreign-currency denominated debt securities and report them at
fair value. The change in fair value of foreign-currency denominated debt for 2008 was reported as gains (losses) on debt
recorded at fair value in our consolidated statements of operations. Upfront costs and fees on foreign-currency denominated
debt are recognized in earnings as incurred and not deferred. For additional information on our election of the fair value
option, see “Recently Adopted Accounting Standards” and “NOTE 18: FAIR VALUE DISCLOSURES.” Prior to 2008,
foreign-currency denominated debt issuances were recorded at amortized cost and translated into U.S. dollars using foreign
exchange spot rates at the balance sheet dates and any resulting gains or losses were reported in non-interest income
(loss) — foreign-currency gains (losses), net.
When we repurchase or call outstanding debt securities, we recognize a gain or loss related to the difference between
the amount paid to redeem the debt security and the carrying value, including any remaining unamortized deferred items
(e.g., premiums, discounts, issuance costs and hedging-related basis adjustments). The balances of remaining deferred items
are reflected in earnings in the period of extinguishment as a component of gains (losses) on debt retirement.
Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security and
satisfaction of an existing debt security are accounted for as either an extinguishment of the existing debt security or a
modification, or debt exchange, of an existing debt security. If the debt securities have substantially different terms, the
transaction is accounted for as an extinguishment of the existing debt security with recognition of any gains or losses in
earnings in gains (losses) on debt retirement, the issuance of a new debt security is recorded at fair value, fees paid to the
creditor are expensed, and fees paid to third parties are deferred and amortized into interest expense over the life of the new
debt obligation using the effective interest method. If the terms of the existing debt security and the new debt security are
not substantially different, the transaction is accounted for as a debt exchange, fees paid to the creditor are deferred and
amortized over the life of the modified debt security using the effective interest method, and fees paid to third parties are
expensed as incurred. In a debt exchange, the following are considered to be a basis adjustment on the new debt security and
are amortized as an adjustment of interest expense over the remaining term of the new debt security: (a) the fees associated
with the new debt security and any existing unamortized premium or discount; (b) concession fees on the existing debt
security; and (c) hedge gains and losses on the existing debt security.
Derivatives
We account for our derivatives pursuant to the accounting standards for derivatives and hedging. Derivatives are
reported at their fair value on our consolidated balance sheets. Derivatives in an asset position, including net derivative
interest receivable or payable, are reported as derivative assets, net. Similarly, derivatives in a net liability position, including
net derivative interest receivable or payable, are reported as derivative liabilities, net. We offset fair value amounts
recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts
recognized for derivative instruments executed with the same counterparty under a master netting agreement. Changes in fair
value and interest accruals on derivatives are recorded as derivative gains (losses) in our consolidated statements of
operations.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. In connection with
the adoption of an amendment to derivatives and hedging accounting regarding certain hybrid financial instruments on
January 1, 2007, we elected to measure newly acquired or issued financial instruments that contain embedded derivatives at
fair value, with changes in fair value recorded in our consolidated statements of operations. At December 31, 2009 and 2008,
we did not have any embedded derivatives that were bifurcated and accounted for as freestanding derivatives.
At December 31, 2009 and 2008, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to terminated or de-designated cash flow hedge relationships. These deferred gains and
losses on closed cash flow hedges are recognized in earnings as the originally forecasted transactions affect earnings. If it
becomes probable the originally forecasted transaction will not occur, the associated deferred gain or loss in AOCI would be
reclassified to earnings immediately.
The changes in fair value of the derivatives in cash flow hedge relationships are recorded as a separate component of
AOCI to the extent the hedge relationships are effective, and amounts are reclassified to earnings when the forecasted
transaction affects earnings.
REO
REO is initially recorded at fair value less estimated costs to sell and is subsequently carried at the lower-of-cost-or-
fair-value less estimated costs to sell. When we acquire REO, losses arise when the carrying basis of the loan (including
accrued interest) exceeds the fair value of the foreclosed property, net of estimated costs to sell and expected recoveries
223 Freddie Mac