Freddie Mac 2010 Annual Report Download - page 253

Segment Earnings presented include the following items that are included in our GAAP-basis earnings, but were
deferred or excluded under the previous method for presenting Segment Earnings:
• Current period GAAP earnings impact of fair value accounting for investments, debt and derivatives;
• Allocation of the valuation allowance established against our net deferred tax assets;
• Gains and losses on investment sales and debt retirements;
• Losses on loans purchased and related recoveries;
• Other-than-temporary impairment of securities recognized in earnings in excess of expected losses; and
• GAAP-basis accretion income that may result from impairment adjustments.
We restated Segment Earnings for the years ended December 31, 2009 and 2008 to reflect the changes in our method of
evaluating the performance of our reportable segments described above. These revisions significantly impacted the prior
period reported results for the Investments segment and, to a lesser extent, the Single-family Guarantee segment, because the
revised method includes fair value adjustments, gains and losses on investment sales, loans purchased from PC pools and
debt retirements that are included in GAAP-based earnings, but that had previously been excluded from or deferred in
Segment Earnings. These revisions did not have a significant impact on the prior period results for the Multifamily segment.
The restated Segment Earnings for the years ended December 31, 2009 and 2008 do not include changes to the
guarantee asset, guarantee obligation or other items that were eliminated or changed as a result of the amendments to the
accounting standards for transfers of financial assets and consolidation of VIEs adopted on January 1, 2010, as these changes
were applied prospectively consistent with our GAAP financial results. See “NOTE 2: CHANGE IN ACCOUNTING
PRINCIPLES” for further information regarding the consolidation of certain of our securitization trusts.
Many of the reclassifications, adjustments and allocations described below relate to the amendments to the accounting
standards for transfers of financial assets and consolidation of VIEs. These amendments require us to consolidate our single-
family PC trusts and certain Other Guarantee Transactions, which makes it difficult to view the results of the three operating
segments from a GAAP perspective. For example, as a result of the amendments, the net guarantee fee earned on mortgage
loans held by our consolidated trusts is included in net interest income on our GAAP consolidated statements of operations.
Previously, we separately recorded the guarantee fee on our GAAP consolidated statements of operations as a component of
non-interest income. Through the reclassifications described below, we move the net guarantee fees earned on mortgage
loans into Segment Earnings management and guarantee income.
Investment Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our investment activities, including those described below. Through these reclassifications, we move certain
items into or out of net interest income so that, on a Segment Earnings basis, net interest income reflects how we measure
the effective interest on securities held in our mortgage investments portfolio and our cash and other investments portfolio.
We use derivatives extensively in our investment activity. The reclassifications described below allow us to reflect, in
Segment Earnings net interest income, the costs associated with this use of derivatives.
• The accrual of periodic cash settlements of all derivatives is reclassified in Segment Earnings from derivative gains
(losses) into net interest income to fully reflect the periodic cost associated with the protection provided by these
contracts.
• Up-front cash paid or received upon the purchase or writing of swaptions and other option contracts is reclassified in
Segment Earnings prospectively on a straight-line basis from derivative gains (losses) into net interest income over the
contractual life of the instrument to fully reflect the periodic cost associated with the protection provided by these
contracts.
Amortization related to certain items is not relevant to how we measure the economic yield earned on the securities held
in our investments portfolio. Therefore, as described below, we reclassify these items in Segment Earnings from net interest
income to non-interest income.
• Amortization related to derivative commitment basis adjustments associated with mortgage-related and non-mortgage-
related securities is reclassified in Segment Earnings from net interest income to non-interest income.
• Amortization related to accretion of other-than-temporary impairments on non-mortgage-related securities held in our
cash and other investments portfolio is reclassified in Segment Earnings from net interest income to non-interest
income.
• Amortization related to premiums and discounts associated with PCs and Other Guarantee Transactions issued by our
consolidated trusts that we previously held and subsequently transferred to third parties is reclassified in Segment
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