Freddie Mac 2009 Annual Report Download - page 300

NOTE 18: FAIR VALUE DISCLOSURES
Fair Value Hierarchy
Effective January 1, 2008, we adopted an amendment to the accounting standards for fair value measurements and
disclosures which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. 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. Observable inputs reflect market data obtained from independent
sources. Unobservable inputs reflect assumptions based on the best information available under the circumstances. We use
valuation techniques that maximize the use of observable inputs, where available, and minimize the use of unobservable
inputs.
The three levels of the fair value hierarchy under this amendment are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets
or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; inputs other than quoted market prices that are observable for
the asset or liability; and inputs that are derived principally from or corroborated by observable market data
for substantially the full term of the assets; and
Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are
significant to the fair values.
As required by this amendment, assets and liabilities are classified in their entirety within the fair value hierarchy based
on the lowest level input that is significant to the fair value measurement. Table 18.1 sets forth by level within the fair value
hierarchy assets and liabilities measured and reported at fair value on a recurring basis in our consolidated balance sheets at
December 31, 2009 and 2008.
297 Freddie Mac