Freddie Mac 2010 Annual Report Download - page 192

identifiable with an REO property are included in REO operations income (expense); all other expenses are recognized
within other administrative expenses in our consolidated statement of operations. Estimated declines in REO fair value that
result from ongoing valuation of the properties are provided for and charged to REO operations income (expense) when
identified. Any gains and losses from REO dispositions are included in REO operations income (expense).
Income Taxes
We use the asset and liability method of accounting for income taxes under GAAP. Under this method, deferred tax
assets and liabilities are recognized based upon the expected future tax consequences of existing temporary differences
between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax rates as well as
tax net operating loss and tax credit carryforwards. To the extent tax laws change, deferred tax assets and liabilities are
adjusted, when necessary, in the period that the tax change is enacted. Valuation allowances are recorded to reduce net
deferred tax assets when it is more likely than not that a tax benefit will not be realized. The realization of these net deferred
tax assets is dependent upon the generation of sufficient taxable income in available carryback years, from current operations
and from unrecognized tax benefits, and upon our intent and ability to hold available-for-sale debt securities until the
recovery of any temporary unrealized losses. On a quarterly basis, our management determines whether a valuation
allowance is necessary. In so doing, our management considers all evidence currently available, both positive and negative, in
determining whether, based on the weight of that evidence, it is more likely than not that the net deferred tax assets will be
realized. Our management determined that, as of December 31, 2010 and 2009, it was more likely than not that we would
not realize the portion of our net deferred tax assets that is dependent upon the generation of future taxable income. This
determination was driven by events and the resulting uncertainties that existed as of December 31, 2010 and 2009. For more
information about the evidence that management considers and our determination of the need for a valuation allowance, see
“NOTE 14: INCOME TAXES.”
Regarding tax positions taken or expected to be taken (and any associated interest and penalties), we recognize a tax
position so long as it is more likely than not that it will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. See “NOTE 14: INCOME
TAXES” for additional information.
Income tax benefit (expense) includes: (a) deferred tax benefit (expense), which represents the net change in the
deferred tax asset or liability balance during the year plus any change in a valuation allowance; and (b) current tax benefit
(expense), which represents the amount of tax currently payable to or receivable from a tax authority including any related
interest and penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and penalties).
Income tax benefit (expense) excludes the tax effects related to adjustments recorded to equity.
Earnings Per Common Share
Because we have participating securities, we use the “two-class” method of computing earnings per common share. The
“two-class” method is an earnings allocation formula that determines earnings per share for common stock and participating
securities based on dividends declared and participation rights in undistributed earnings. Our participating securities consist
of: (a) vested and unvested options to purchase common stock; and (b) restricted stock units that earn dividend equivalents at
the same rate when and as declared on common stock.
Basic earnings per common share is computed as net income available to common stockholders divided by the weighted
average common shares outstanding for the period. The weighted average common shares outstanding for our basic earnings
per share calculation includes the weighted average number of shares that are associated with the warrant for our common
stock issued to Treasury as part of the Purchase Agreement. This warrant is included since it is unconditionally exercisable
by the holder at a minimal cost of $0.00001 per share. Diluted earnings per common share is determined using the weighted
average number of common shares during the period, adjusted for the dilutive effect of common stock equivalents. Dilutive
common stock equivalents reflect the assumed net issuance of additional common shares pursuant to certain of our stock-
based compensation plans that could potentially dilute earnings per common share.
Comprehensive Income
Comprehensive income is the change in equity, on a net of tax basis, resulting from transactions and other events and
circumstances from non-owner sources during a period. It includes all changes in equity during a period, except those
resulting from investments by stockholders. We define comprehensive income as consisting of net income (loss) plus changes
in: (a) the unrealized gains and losses on available-for-sale securities; (b) the effective portion of derivatives accounted for as
cash flow hedge relationships; and (c) defined benefit plans.
189 Freddie Mac