Freddie Mac 2009 Annual Report Download - page 230

Disclosure about Derivative Instruments and Hedging Activities
We adopted an amendment to the accounting standards for derivatives and hedging on January 1, 2009. This
amendment changes and expands the disclosure provisions for derivatives and hedging. It requires enhanced disclosures
about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted
for, and (c) how derivative instruments and related hedged items affect our financial position, financial performance and cash
flows. The adoption of this amendment enhanced our disclosures of derivative instruments and hedging activities in
“NOTE 13: DERIVATIVES” but had no impact on our consolidated financial statements.
Other Changes in Accounting Principles
At December 31, 2008, we adopted an amendment to the impairment guidance of investments in beneficial interests in
securitized financial assets, which aligns the impairment guidance for debt securities within the scope of the accounting
standards for investments in beneficial interests in securitized financial assets with that for other available-for-sale or held-
for-maturity debt securities; however, it does not change the interest income recognition method prescribed by the accounting
standards for investments in beneficial interests in securitized financial assets. The adoption of this amendment did not have
a material impact on our consolidated financial statements.
Effective January 1, 2008, we adopted an amendment to the accounting standards for fair value measurements and
disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. This amendment defines fair value as 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 (also referred to as exit
price). The adoption of this amendment did not cause a cumulative effect adjustment to our GAAP consolidated financial
statements on January 1, 2008. This amendment also changed the initial measurement requirements for guarantees to provide
for a practical expedient in measuring the fair value at inception of a guarantee. Upon adoption of this amendment on
January 1, 2008, we began measuring the fair value of our newly-issued guarantee obligations at their inception using the
practical expedient provided by the initial measurement requirements 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, we no longer record estimates of deferred gains or immediate
“day one” losses on most guarantees.
Effective January 1, 2008, we adopted an amendment to the measurement date provisions in accounting requirements
for defined benefit pension and other post retirement plans. In accordance with the standard, we are required to measure our
defined plan assets and obligations as of the date of our consolidated balance sheet, which necessitated a change in our
measurement date from September 30 to December 31. The transition approach we elected for the change was the 15-month
approach. Under this approach, we continued to use the measurements determined in our 2007 consolidated financial
statements to estimate the effects of the change. Our adoption did not have a material impact on our consolidated financial
statements.
On January 1, 2008, we adopted the accounting standard related to the fair value option for financial assets and
financial liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair
value that are not required to be measured at fair value. The effect of the first measurement to fair value was reported as a
cumulative-effect adjustment to the opening balance of retained earnings (accumulated deficit). We elected the fair value
option for foreign-currency denominated debt and certain available-for-sale mortgage-related securities, including
investments in securities identified as within the scope of the accounting standards for investments in beneficial interests in
securitized financial assets. Our election of the fair value option for the items discussed above was made in an effort to
better reflect, in the financial statements, the economic offsets that exist related to items that were not previously recognized
as changes in fair value through our consolidated statements of operations. As a result of the adoption, we recognized a
$1.0 billion after-tax increase to our beginning retained earnings (accumulated deficit) at January 1, 2008, representing the
effect of changing our measurement basis to fair value for the above items with the fair value option elected. During the
third quarter of 2008, we elected the fair value option for certain multifamily held-for-sale mortgage loans. For additional
information on the election of the fair value option, see “NOTE 18: FAIR VALUE DISCLOSURES.”
Effective December 31, 2007, we retrospectively changed our method of accounting for our guarantee obligation: 1) to
a policy of no longer extinguishing our guarantee obligation when we purchase all or a portion of a guaranteed PC and
Structured Security from a policy of effective extinguishment through the recognition of a Participation Certificate residual
and 2) to a policy that amortizes our guarantee obligation into earnings in a manner that corresponds more closely to our
economic release from risk under our guarantee than our former policy, which amortized our guarantee obligation according
to the contractual expiration of our guarantee as observed by the decline in the unpaid principal balance of securitized
mortgage loans. While our previous accounting was acceptable, we believe the adopted method of accounting for our
guarantee obligation is preferable in that it significantly enhances the transparency and understandability of our financial
227 Freddie Mac