Freddie Mac 2010 Annual Report Download - page 193

Recently Issued Accounting Standards, Not Yet Adopted Within These Consolidated Financial Statements
Accounting for Multiple-Deliverable Arrangements
In October 2009, the FASB issued an amendment to the accounting standards on revenue recognition for multiple-
deliverable revenue arrangements. This amendment changes the criteria for separating consideration in multiple-deliverable
arrangements and establishes a selling price hierarchy for determining the selling price of a deliverable. It eliminates the
residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. This amendment is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Our
adoption of this amendment on January 1, 2011 is not expected to have a material impact on our consolidated financial
statements in 2011.
NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES
Accounting for Transfers of Financial Assets and Consolidation of VIEs
In June 2009, the FASB issued two new accounting standards that amended guidance applicable to the accounting for
transfers of financial assets and the consolidation of VIEs. The guidance in these standards is effective for fiscal years
beginning after November 15, 2009. The accounting standard for transfers of financial assets is applicable on a prospective
basis to new transfers, while the accounting standard relating to consolidation of VIEs must be applied prospectively to all
entities within its scope as of the date of adoption. Effective January 1, 2010, we prospectively adopted these new accounting
standards.
We use securitization trusts in our securities issuance process. Prior to January 1, 2010, these trusts met the definition of
QSPEs and were not subject to consolidation. Effective January 1, 2010, the concept of a QSPE was removed from GAAP
and entities previously considered QSPEs were required to be evaluated for consolidation. Based on our consolidation
evaluation, we determined that we are the primary beneficiary of trusts that issue our single-family PCs and certain Other
Guarantee Transactions. As a result, a large portion of our off-balance sheet assets and liabilities prior to January 1, 2010
have been consolidated. Effective January 1, 2010, we consolidated these trusts and recognized the assets and liabilities at
their UPB, with accrued interest, allowance for credit losses or other-than-temporary impairments recognized as appropriate,
using the practical expedient permitted upon adoption since we determined that calculation of historical carrying values was
not practical. Other newly consolidated assets and liabilities that either do not have a UPB or are required to be carried at
fair value were measured at fair value. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Consolidation and Equity Method of Accounting” for a discussion of our assessment to determine whether we are considered
the primary beneficiary of a trust and thus need to consolidate it. As such, we recognized on our consolidated balance sheets
the mortgage loans underlying our issued single-family PCs and certain Other Guarantee Transactions as mortgage loans
held-for-investment by consolidated trusts, at amortized cost. We also recognized the corresponding single-family PCs and
certain Other Guarantee Transactions held by third parties on our consolidated balance sheets as debt securities of
consolidated trusts held by third parties. After January 1, 2010, new consolidations of trust assets and liabilities are recorded
at either their: (a) carrying value if the underlying assets are contributed by us to the trust and consolidated at the time of
transfer; or (b) fair value for the assets and liabilities that are consolidated under the securitization trusts established for our
guarantor swap program, rather than their UPB.
In light of the consolidation of our single-family PC trusts and certain Other Guarantee Transactions as discussed above,
effective January 1, 2010 we elected to change the amortization method for deferred items (e.g., premiums, discounts, and
other basis adjustments) related to mortgage loans and investments in securities. We made this change to align the
amortization method for these assets with the amortization method for deferred items associated with the related liabilities.
As a result of this change, deferred items are amortized into interest income using an effective interest method over the
contractual lives of these assets instead of the estimated life that was used for periods prior to 2010. It was impracticable to
retrospectively apply this change to prior periods, so we recognized this change as a cumulative effect adjustment to the
opening balance of retained earnings (accumulated deficit), and future amortization of these deferred items will be
recognized using this new method. The effect of the change in the amortization method for deferred items was immaterial to
our consolidated financial statements in 2010.
The cumulative effect of these changes in accounting principles was a net decrease of $11.7 billion to total equity
(deficit) as of January 1, 2010, which includes changes to the opening balances of retained earnings (accumulated deficit)
and AOCI. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting from the
extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference between
the UPB of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts, and other basis
adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees issued to
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