Freddie Mac 2010 Annual Report Download - page 82

Income Tax Benefit (Expense)
For 2010, 2009, and 2008, we reported income tax benefit (expense) of $0.9 billion, $0.8 billion, and $(5.6) billion,
respectively, resulting in effective tax rates of 6%, 4%, and (12)%, respectively. Our effective tax rate differed from the
federal statutory tax rate of 35% primarily due to the establishment of a valuation allowance against a portion of our net
deferred tax assets. The income tax benefits recognized in 2010 and 2009 represent the current tax benefits associated with
our ability to carry back net operating tax losses generated in 2009 and expected to be generated in 2010, as well as amounts
related to the amortization of net deferred losses on pre-2008 closed cash flow hedges. See “NOTE 14: INCOME TAXES”
for additional information.
Segment Earnings
Our operations consist of three reportable segments, which are based on the type of business activities each performs —
Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are
included in the All Other category.
The Investments segment reflects results from our investment, funding and hedging activities. In our Investments
segment, we invest principally in mortgage-related securities and single-family mortgage loans funded by other debt
issuances and hedged using derivatives. Segment Earnings for this segment consist primarily of the returns on these
investments, less the related funding, hedging, and administrative expenses.
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-
family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary
mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans
into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related
securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of
management and guarantee fee revenues, including amortization of upfront fees, less the related credit costs (i.e., provision
for credit losses), administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.
The Multifamily segment reflects results from our investments and guarantee activities in multifamily mortgage loans
and securities. Our new purchases of multifamily mortgage loans are primarily made for purposes of aggregation and then
securitization, which supports the availability of financing for multifamily properties. We also purchase non-agency CMBS
for investment; however we have not purchased significant amounts of non-agency CMBS for investment since 2008. The
Multifamily segment does not issue REMIC securities but does issue Other Structured Securities, Other Guarantee
Transactions, and other guarantee commitments. Segment Earnings for this segment include management and guarantee fee
income and the interest earned on assets related to multifamily investment activities, net of allocated funding costs.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct
of our business under the direction of the Conservator. Beginning January 1, 2010, we revised our method for presenting
Segment Earnings to reflect changes in how management measures and assesses the performance of each segment and the
company as a whole. This change in method, in conjunction with our implementation of changes in accounting standards
relating to transfers of financial assets and the consolidation of VIEs, resulted in significant changes to our presentation of
Segment Earnings. Under the revised method, the financial performance of our segments is measured based on each
segment’s contribution to GAAP net income (loss). Beginning January 1, 2010, under the revised method, the sum of
Segment Earnings for each segment and the All Other category will equal GAAP net income (loss) attributable to Freddie
Mac.
Segment Earnings for periods presented prior to 2010 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.
Under the revised method of presenting Segment Earnings, the All Other category consists of material corporate level
expenses that are: (a) non-recurring in nature; and (b) based on management decisions outside the control of the management
of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results
of our three reportable segments represent the decisions and strategies that are executed within the reportable segments and
provide greater comparability across time periods. Items included in the All Other category consist of: (a) the deferred tax
asset valuation allowance associated with previously recognized income tax credits carried forward; and (b) in 2009, the
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