Freddie Mac 2010 Annual Report Download - page 198

Change in the Impairment Model for Debt Securities
On April 1, 2009, we prospectively adopted an amendment to the accounting standards for investments in debt and
equity securities. This amendment changed the recognition, measurement, and presentation of other-than-temporary
impairment for debt securities. To determine whether an other-than-temporary impairment exists, we assess whether we
intend to sell or more likely than not will be required to sell the security prior to its anticipated recovery. The entire amount
of other-than-temporary impairment related to securities which we intend to sell or for which it is more likely than not that
we will be required to sell, is recognized in our consolidated statements of operations as net impairment on available-for-sale
securities recognized in earnings. For securities that we do not intend to sell or for which it is not more likely than not that
we will be required to sell, but for which we do not expect to recover the securities’ amortized cost basis, the amount of
other-than-temporary impairment is separated between amounts recorded in earnings or AOCI. Other-than-temporary
impairment amounts related to credit loss are recognized in net impairment of available-for-sale securities recognized in
earnings and the amounts attributable to all other factors are recorded to AOCI.
As a result of the adoption, we recognized a cumulative-effect adjustment, net of tax, of $15.0 billion to our opening
balance of retained earnings (accumulated deficit) on April 1, 2009, with a corresponding adjustment of $(9.9) billion, to
AOCI. The cumulative adjustment reclassifies the non-credit component of previously recognized other-than-temporary
impairments from retained earnings to AOCI. The difference between these adjustments of $5.1 billion primarily represents
the release of the valuation allowance previously recorded against the deferred tax asset that is no longer required upon
adoption of this amendment. See “NOTE 8: INVESTMENTS IN SECURITIES” for further disclosures regarding our
investments in securities and other-than-temporary impairments.
The Fair Value Option for Financial Assets and Financial Liabilities
On January 1, 2008, we adopted the accounting standard 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. The effect of the first measurement to fair value was reported as a
cumulative-effect adjustment to the opening balance of retained earnings (accumulated deficit). We elected the fair value
option for foreign-currency denominated debt and certain available-for-sale mortgage-related securities, including investments
in securities identified as within the scope of the accounting standards for investments in beneficial interests in securitized
financial assets. Our election of the fair value option for the items discussed above was made in an effort to better reflect, in
the financial statements, the economic offsets that exist related to items that were not previously recognized as changes in
fair value through our consolidated statements of operations. As a result of the adoption, we recognized a $1.0 billion after-
tax increase to our beginning retained earnings (accumulated deficit) at January 1, 2008, representing the effect of changing
our measurement basis to fair value for the above items with the fair value option elected. During the third quarter of 2008,
we elected the fair value option for certain multifamily held-for-sale mortgage loans. For additional information on the
election of the fair value option, see “NOTE 20: FAIR VALUE DISCLOSURES.”
NOTE 3: CONSERVATORSHIP AND RELATED MATTERS
Entry Into Conservatorship
On September 6, 2008, the Director of FHFA placed us into conservatorship. On September 7, 2008, Treasury and
FHFA announced several actions regarding Freddie Mac and Fannie Mae. These actions included the execution of the
Purchase Agreement, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common
stock.
Business Objectives
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under
the direction of FHFA, as our Conservator. The conservatorship and related matters have had a wide-ranging impact on us,
including our regulatory supervision, management, business, financial condition and results of operations. Upon its
appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the
title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. During the
conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and management to
conduct, day-to-day operations so that the company can continue to operate in the ordinary course of business. The directors
serve on behalf of, and exercise authority as directed by, the Conservator.
We are also subject to certain constraints on our business activities by Treasury due to the terms of, and Treasury’s
rights under, the Purchase Agreement. Our ability to access funds from Treasury under the Purchase Agreement is critical to
keeping us solvent.
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