Freddie Mac 2014 Annual Report Download - page 160

155 Freddie Mac
of the accounting guidance for investments in beneficial interests in securitized financial assets. These securities are classified
as trading securities. By electing the fair value option for these instruments, we reflect valuation changes through our
consolidated statements of comprehensive income in the period they occur. For additional information on our election of the
fair value option, see “NOTE 16: FAIR VALUE DISCLOSURES.”
We record purchases and sales of securities that are exempt from the accounting guidance for derivatives and hedge
accounting on a trade date basis. Securities underlying forward purchases and sales contracts that are not exempt from the
requirements of derivatives and hedge accounting are recorded on the expected settlement date with a corresponding
commitment recorded on the trade date.
For most of our investments in securities, interest income is recognized using the effective interest method. Deferred
items, including premiums, discounts, and other basis adjustments, are amortized into interest income over the contractual lives
of the securities.
For certain investments in securities, interest income is recognized using the prospective effective interest method. We
specifically apply this accounting to beneficial interests in securitized financial assets that: (a) can contractually be prepaid or
otherwise settled in such a way that we may not recover substantially all of our recorded investment; (b) are not of high credit
quality at the acquisition date; or (c) have been determined to be other-than-temporarily impaired. We recognize as interest
income (over the life of these securities) the excess of all estimated cash flows attributable to these interests over their book
value using the effective interest method. We update our estimates of expected cash flows periodically and recognize changes
in the calculated effective interest rate on a prospective basis.
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-
temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost
basis. As discussed further below, certain other-than-temporary impairment losses are recognized in earnings.
If we intend to sell the security or believe it is more likely than not that we will be required to sell the security prior to
recovery of its amortized cost basis, the security’s entire decline in fair value is deemed to be other-than-temporary and is
recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings. If we do not intend to sell the security and we believe it is not more likely than not that we will be
required to sell prior to recovery of the security’s unrealized loss, we recognize only the credit component of other-than-
temporary impairment in earnings and the amounts attributable to all other factors are recorded in AOCI. The credit component
represents the amount by which the present value of cash flows expected to be collected from the security is less than the
amortized cost basis of the security. The present value of expected future cash flows represents our estimate of future
contractual cash flows that we expect to collect, discounted at the original effective interest rate or the effective interest rate
determined based on significantly improved cash flows subsequent to initial impairment.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of numerous factors. We perform an evaluation on a security-by-
security basis considering all available information. The relative importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic environment at the time of assessment. For information
regarding important factors, judgments and assumptions, see “NOTE 7: INVESTMENTS IN SECURITIES — Impairment
Recognition on Investments in Securities.”
Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method for
determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale, we classify the cash flows as investing activities because we hold
these securities for investment purposes. In cases where the transfer of available-for-sale securities represents a secured
borrowing, we classify the related cash flows as financing activities.
Repurchase and Resale Agreements and Dollar Roll Transactions
We enter into repurchase and resale agreements primarily as an investor or to finance certain of our security positions.
Such transactions are accounted for as secured financings because the transferor does not relinquish control over the transferred
assets.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently repurchase (or
purchase and subsequently resell) agency securities. When these transactions involve securities issued by consolidated entities,
they are treated as issuances and extinguishments of debt. When these transactions involve securities issued by entities we do
not consolidate, they are treated as purchases and sales as the security initially transferred is not required to be the same or
substantially the same as the security subsequently returned.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt. The debt securities of our consolidated trusts are prepayable without penalty at any
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