Freddie Mac 2010 Annual Report Download - page 268

commitments. However, we monitor the credit fundamentals of the counterparties to our forward purchase and sale
commitments on an ongoing basis to ensure that they continue to meet our internal risk-management standards.
NOTE 20: FAIR VALUE DISCLOSURES
Fair Value Hierarchy
The accounting standards for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. Fair value represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Observable
inputs reflect market data obtained from independent sources. Unobservable inputs reflect assumptions based on the best
information available under the circumstances. We use valuation techniques that maximize the use of observable inputs,
where available, and minimize the use of unobservable inputs.
The three levels of the fair value hierarchy are described below:
• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical
assets or liabilities;
• Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; inputs other than quoted market prices that are
observable for the asset or liability; and inputs that are derived principally from or corroborated by
observable market data for substantially the full term of the assets; and
• Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are
significant to the fair values.
Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is
significant to the fair value measurement. Table 20.1 sets forth by level within the fair value hierarchy assets and liabilities
measured and reported at fair value on a recurring basis in our consolidated balance sheets at December 31, 2010 and 2009.
265 Freddie Mac