Freddie Mac 2010 Annual Report Download - page 182

approvals prior to modifying the corresponding loan data within our loan reporting systems. This backlog in processing loan
modifications and short sales resulted in erroneous loan data within our loan reporting systems, thereby impacting our
financial accounting and reporting systems. Prior to the second quarter of 2010, while we modified our loan loss reserving
processes to consider potential processing lags in loan workout data, we failed to fully adjust for the impacts of the resulting
erroneous loan data on our financial statements. The resulting error impacted our provision for credit losses, allowance for
loan losses, and provision for income taxes and affected our previously reported financial statements for the interim period
ended March 31, 2010 and the interim 2009 periods and full year ended December 31, 2009. Based upon our evaluation
during the second quarter of 2010 of all relevant quantitative and qualitative factors related to this error, we concluded that
this error was not material to our previously issued consolidated financial statements for any of the periods affected and was
not material to our then estimated earnings for the full year ended December 31, 2010 or to the trend of earnings. As a
result, in accordance with the accounting standard related to accounting changes and correction of errors, we recorded the
cumulative effect of this error as a correction in the second quarter of 2010 as an increase to our provision for credit losses.
The cumulative effect, net of taxes, of this error corrected in the second quarter of 2010 was $1.2 billion, of which
$0.9 billion related to the year ended December 31, 2009. Our updated analysis based on the impact of this error relative to
full-year actual results did not change our conclusion that it is not material to our actual earnings for the full year ended
December 31, 2010 or to the trend of earnings.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and
(b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has made
significant estimates in preparing the financial statements, including, but not limited to, valuing financial instruments and
other assets and liabilities, establishing the allowance for loan losses and reserves for guarantee losses, assessing impairments
and subsequent accretion of impairments on investments and assessing the realizability of net deferred tax assets. Actual
results could be different from these estimates.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. The equity and net earnings
attributable to the noncontrolling interests in our consolidated subsidiaries are reported separately on our consolidated
balance sheets as noncontrolling interest in total equity (deficit) and in the consolidated statements of operations as net
income (loss) attributable to noncontrolling interest. All material intercompany transactions have been eliminated in
consolidation.
For each entity with which we are involved, we determine whether the entity should be consolidated in our financial
statements. The consolidation assessment methodologies vary between a VIE and a non-VIE. A VIE is an entity: (a) that has
a total equity investment at risk that is not sufficient to finance its activities without additional subordinated financial support
provided by another party; or (b) where the group of equity holders does not have: (i) the power, through voting rights or
similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance; (ii) the
obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
For VIEs, our policy is to consolidate all entities in which we hold a controlling financial interest and are therefore
deemed to be the primary beneficiary. An enterprise has a controlling financial interest in, and thus is the primary
beneficiary of, a VIE if it has both: (a) the power to direct the activities of the VIE that most significantly impact its
economic performance; and (b) exposure to losses or benefits of the VIE that could potentially be significant to the VIE. We
perform ongoing assessments to determine if we are the primary beneficiary of the VIEs with which we are involved and, as
such, conclusions may change over time.
Historically, we were exempt from applying the accounting guidance applicable to consolidation of VIEs to the majority
of our securitization trusts, as well as certain of our investment securities issued by third parties, because they had been
designed to meet the definition of a QSPE. Upon the effective date of the amendments to the accounting standards for
transfers of financial assets and consolidation of VIEs, the concept of a QSPE and the related scope exception from the
consolidation provisions applicable to VIEs were removed from GAAP; consequently, all of our securitization trusts, as well
as our investment securities issued by third parties that had previously been QSPEs, became subject to a consolidation
assessment. The results of our consolidation assessments on certain of these securitization trusts are explained in the
paragraphs that follow.
We use securitization trusts in our securities issuance process that are VIEs. We are the primary beneficiary of trusts
that issue our single-family PCs and certain Other Guarantee Transactions. See “NOTE 4: VARIABLE INTEREST
ENTITIES” for more information. When we transfer assets into a VIE that we consolidate at the time of the transfer (or
shortly thereafter), we recognize the assets and liabilities of the VIE at the amounts that they would have been recognized if
179 Freddie Mac