Freddie Mac 2010 Annual Report Download - page 190

net of tax, in AOCI. The credit component represents the amount by which the present value of cash flows expected to be
collected from the security is less than the amortized cost basis of the security. The evaluation of whether unrealized losses
on available-for-sale securities are other-than-temporary contemplates numerous factors. We perform an evaluation on a
security-by-security basis considering all available information and our analysis is refined where the current fair value or
other characteristics of the security warrant. The relative importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic environment at the time of assessment. See “NOTE 8:
INVESTMENTS IN SECURITIES — Impairment Recognition on Investments in Securities” for a discussion of important
factors we consider in our evaluation.
For the majority of our available-for-sale securities in an unrealized loss position, we have asserted that we have no
intent to sell and that we believe it is not more likely than not that we will be required to sell the security before recovery of
its amortized cost basis. Where such an assertion has not been made, the security’s entire decline in fair value is deemed to
be other than temporary and is recorded within our consolidated statements of operations as net impairment of available-for-
sale securities recognized in earnings.
We elected the fair value option for available-for-sale securities identified as within the scope of the accounting
standards for investments in beneficial interests in securitized financial assets to better reflect the valuation changes that
occur subsequent to impairment write-downs recorded on these instruments. By electing the fair value option for these
instruments, we reflect valuation changes through our consolidated statements of operations in the period they occur,
including increases in value. For additional information on our election of the fair value option, see “NOTE 20: FAIR
VALUE DISCLOSURES.”
Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method for
determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale and those securities where we elected the fair value option, we
classify the cash flows as investing activities because we hold these securities for investment purposes. In cases where the
transfer of available-for-sale securities represents a secured borrowing, we classify the related cash flows as financing
activities.
Repurchase and Resale Agreements and Dollar Roll Transactions
We enter into repurchase and resale agreements primarily as an investor or to finance certain of our security positions.
Such transactions are accounted for as secured financings because the transferor does not relinquish control over the
transferred assets.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently repurchase (or
purchase and subsequently resell) agency securities. When these transactions involve securities issued by consolidated
entities, they are treated as issuances and extinguishments of debt. When these transactions involve securities issued by
entities we do not consolidate, they are generally treated as purchases and sales as the security initially transferred is not
required to be the same or substantially the same as the security subsequently returned.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt.
As a result of the adoption of the amendments to the accounting standards on transfers of financial assets and the
consolidation of VIEs, we consolidated our single-family PC trusts and certain Other Guarantee Transactions in our financial
statements commencing January 1, 2010. Consequently, PCs and Other Guarantee Transactions issued by the consolidated
trusts and held by third parties are recognized as debt securities of consolidated trusts held by third parties on our
consolidated balance sheets. The debt securities of our consolidated trusts are prepayable without penalty at any time. Other
debt represents short-term and long-term debt securities that we issue to third parties to fund our general business activities.
Both debt of our consolidated trusts and other debt, except for certain debt for which we elected the fair value option,
are reported at amortized cost. Deferred items, including premiums, discounts, and hedging-related basis adjustments are
reported as a component of total debt, net. Issuance costs are reported as a component of other assets. These items are
amortized and reported through interest expense using the effective interest method over the contractual life of the related
indebtedness. Amortization of premiums, discounts, and issuance costs begins at the time of debt issuance. Amortization of
hedging-related basis adjustments is initiated upon the discontinuation of the related hedge relationship.
We elected the fair value option on foreign currency denominated debt and certain other debt securities. The change in
fair value for debt recorded at fair value is 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
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