Freddie Mac 2010 Annual Report Download - page 254

Earnings from net interest income to non-interest income. The amortization is related to deferred gains (losses) on
transfers of these securities.
Credit Guarantee Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our credit-guarantee activities, including those described below. All credit guarantee-related income and
costs are included in Segment Earnings management and guarantee income.
• Net guarantee fee is reclassified in Segment Earnings from net interest income to management and guarantee income.
• Implied management and guarantee fee related to unsecuritized mortgage loans held in the mortgage investments
portfolio is reclassified in Segment Earnings from net interest income to management and guarantee income.
• The portion of the amount reversed for accrued but uncollected interest upon placing loans on a non-accrual status
that relates to guarantee fees is reclassified in Segment Earnings from net interest income to management and
guarantee income. The remaining portion of the allowance for lost interest is reclassified in Segment Earnings from
net interest income to provision for credit losses. Under GAAP-basis earnings and Segment Earnings, the guarantee
fee is not accrued on loans three monthly payments or more past due.
Segment Adjustments
In presenting Segment Earnings net interest income and management and guarantee income, we make adjustments to
better reflect how management measures and assesses the performance of each segment and the company as a whole. These
adjustments relate to amounts that are no longer reflected in net income (loss) as determined in accordance with GAAP as a
result of the adoption of new accounting standards for the transfers of financial assets and the consolidation of VIEs. These
adjustments are reversed through the segment adjustments line item within Segment Earnings, so that Segment Earnings
(loss) for each segment will equal GAAP net income (loss) attributable to Freddie Mac for each segment beginning
January 1, 2010. Segment adjustments consist of the following:
• We adjust our Segment Earnings net interest income for the Investments segment to include the amortization of cash
premiums and discounts and buy-up and buy-down fees on the consolidated Freddie Mac mortgage-related securities
we purchase as investments. As of December 31, 2010, the unamortized balance of such premiums and discounts and
buy-up and buy-down fees was $2.4 billion. These adjustments are necessary to reflect the economic yield realized on
investments in consolidated Freddie Mac mortgage-related securities purchased at a premium or discount or with buy-
up or buy-down fees. We include an offsetting amount in the segment adjustments line within Segment Earnings.
• We adjust our Segment Earnings management and guarantee income for the Single-family Guarantee segment to
include the amortization of delivery fees recorded in periods prior to January 1, 2010. As of December 31, 2010, the
unamortized balance of such fees was $2.9 billion. We consider such fees to be part of the effective rate of the
guarantee fee on guaranteed mortgage loans. This adjustment is necessary in order to better reflect the realization of
revenue associated with guarantee contracts over the life of the underlying loan. We include an offsetting amount in
the segment adjustments line within Segment Earnings.
Segment Allocations
The results of each reportable segment include directly attributable revenues and expenses. Administrative expenses that
are not directly attributable to a segment are allocated to our segments using various methodologies, depending on the nature
of the expense (i.e., semi-direct versus indirect). Net interest income for each segment includes allocated debt funding costs
related to certain assets of each segment. These allocations, however, do not include the effects of dividends paid on our
senior preferred stock. The tax credits generated by the LIHTC partnerships and any valuation allowance on these tax credits
are allocated to the Multifamily segment. The deferred tax asset valuation allowance associated with previously recognized
income tax credits carried forward is allocated to the “All Other” category. All remaining taxes are calculated based on a
35% federal statutory rate as applied to pre-tax Segment Earnings.
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