Freddie Mac 2009 Annual Report Download - page 305

Fair Value Election
On January 1, 2008, we adopted the accounting standards 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. We elected the fair value option for certain available-for-sale
mortgage-related securities, investments in securities classified as available-for-sale securities and identified as in the scope
of the accounting standards for investments in beneficial interests in securitized financial assets and foreign-currency
denominated debt. In addition, we elected the fair value option for multifamily held-for-sale mortgage loans in the third
quarter of 2008.
Certain Available-For-Sale Securities with Fair Value Option Elected
We elected the fair value option for certain available-for-sale mortgage-related securities to better reflect the natural
offset these securities provide to fair value changes recorded on our guarantee asset. We record fair value changes on our
guarantee asset through our consolidated statements of operations. However, we historically classified virtually all of our
securities as available-for-sale and recorded those fair value changes in AOCI. The securities selected for the fair value
option include principal only strips and certain pass-through and Structured Securities that contain positive duration features
that provide an offset to the negative duration associated with our guarantee asset. We continually evaluate new security
purchases to identify the appropriate security mix to classify as trading to match the changing duration features of our
guarantee asset.
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. Under the accounting standards for investments in
beneficial interests in securitized financial assets for available-for-sale securities, when an impairment is considered other-
than-temporary, the impairment amount is recorded in our consolidated statements of operations and subsequently accreted
back through interest income as long as the contractual cash flows occur. Any subsequent periodic increases in the value of
the security are recognized through AOCI. By electing the fair value option for these instruments, we will instead reflect
valuation changes through our consolidated statements of operations in the period they occur, including any such increases in
value.
For mortgage-related securities and investments in securities that are selected for the fair value option and subsequently
classified as trading securities, the change in fair value was recorded in gains (losses) on investment activity in our
consolidated statements of operations. See “NOTE 6: INVESTMENTS IN SECURITIES” for additional information
regarding the net unrealized gains (losses) on trading securities, which include gains (losses) for other items that are not
selected for the fair value option. Related interest income continues to be reported as interest income in our consolidated
statements of operations using effective interest methods. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — Investments in Securities” for additional information about the measurement and recognition of interest
income on investments in securities.
Foreign-Currency Denominated Debt with Fair Value Option Elected
In the case of foreign-currency denominated debt, we have entered into derivative transactions that effectively convert
these instruments to U.S. dollar denominated floating rate instruments. We historically recorded the fair value changes on
these derivatives through our consolidated statements of operations in accordance with the accounting standards for
derivatives and hedging. However, the corresponding offsetting change in fair value that occurred in the debt as a result of
changes in interest rates was not permitted to be recorded in our consolidated statements of operations unless we pursued
hedge accounting. As a result, our consolidated statements of operations reflected only the fair value changes of the
derivatives and not the offsetting fair value changes in the debt resulting from changes in interest rates. Therefore, we have
elected the fair value option on the debt instruments to better reflect the economic offset that naturally results from the debt
due to changes in interest rates. We currently do not issue foreign-currency denominated debt and use of the fair value
option in the future for these types of instruments will be evaluated on a case-by-case basis for any new issuances of this
type of debt.
The changes in fair value of foreign-currency denominated debt of $(405) million and $406 million for the year ended
December 31, 2009 and 2008, respectively, were recorded in gains (losses) on debt recorded at fair value in our consolidated
statements of operations. The changes in fair value related to fluctuations in exchange rates and interest rates were
$(202) million and $96 million for the year ended December 31, 2009 and 2008, respectively. The remaining changes in the
fair value of $(203) million and $310 million for the year ended December 31, 2009 and 2008, respectively, were
attributable to changes in the instrument-specific credit risk.
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