Freddie Mac 2014 Annual Report Download - page 161

156 Freddie Mac
time. Other debt represents short-term and long-term debt securities that we issue to third parties to fund our general business
activities.
Both debt of our consolidated trusts and other debt, except for certain debt for which we elected the fair value option, are
reported at amortized cost. Deferred items, including premiums, discounts, and hedging-related basis adjustments are reported
as a component of total debt, net. Issuance costs are reported as a component of other assets. These items are amortized and
reported through interest expense using the effective interest method over the contractual life of the related indebtedness.
Amortization of premiums, discounts, and issuance costs begins at the time of debt issuance. Amortization of hedging-related
basis adjustments begins upon the discontinuation of the related hedge relationship.
We elected the fair value option on certain debt securities of consolidated trusts held by third parties and certain other
debt. The change in fair value for debt recorded at fair value is reported as other income in our consolidated statements of
comprehensive income. For debt where we have elected the fair value option, upfront costs and fees are recognized in earnings
as incurred and not deferred. For additional information on our election of the fair value option, see “NOTE 16: FAIR VALUE
DISCLOSURES.”
When we repurchase or call outstanding debt securities, we recognize a gain or loss related to the difference between the
amount paid to redeem the debt security and the carrying value in earnings as a component of gains (losses) on retirement of
other debt. Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security
and satisfaction of an existing debt security are accounted for as either an extinguishment or a modification of an existing debt
security. If the debt securities have substantially different terms, the transaction is accounted for as an extinguishment of the
existing debt security. The issuance of a new debt security is recorded at fair value, fees paid to the creditor are expensed as
incurred and fees paid to third parties are deferred and amortized into interest expense over the life of the new debt security
using the effective interest method. If the terms of the existing debt security and the new debt security are not substantially
different, the transaction is accounted for as a modification of the existing debt. Fees paid to the creditor are deferred and
amortized into interest expense over the life of the modified unsecured debt security using the effective interest method and
fees paid to third parties are expensed as incurred.
Cash flows related to debt securities issued by our consolidated trusts are classified as either financing activities (e.g.,
repayment of principal to PC holders) or operating activities (e.g., interest payments to PC holders included within net income
(loss)). Other than interest paid, cash flows related to other debt are classified as financing activities. Interest paid on other debt
is classified as operating activities.
Derivatives
Derivatives are reported at their fair value on our consolidated balance sheets. Derivatives in a net asset position,
including net derivative interest receivable or payable, are reported as derivative assets, net. Similarly, derivatives in a net
liability position, including net derivative interest receivable or payable, are reported as derivative liabilities, net. We offset fair
value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value
amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. Changes
in fair value and interest accruals on derivatives are recorded as derivative gains (losses) in our consolidated statements of
comprehensive income. Non-cash collateral held is not recognized on our consolidated balance sheets as we do not obtain
effective control over the collateral, and non-cash collateral posted is not de-recognized from our consolidated balance sheets as
we do not relinquish effective control over the collateral. Therefore, non-cash collateral held or posted is not presented as an
offset against derivative assets or derivative liabilities on our consolidated balance sheets.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. We elected to
measure newly acquired or issued financial instruments that contain embedded derivatives at fair value, with changes in fair
value recorded in our consolidated statements of comprehensive income.
At December 31, 2014 and 2013, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally
forecasted transactions affect earnings. If it becomes probable the originally forecasted transaction will not occur, the associated
deferred gain or loss in AOCI would be reclassified to earnings immediately.
In the consolidated statements of cash flows, cash flows related to the acquisition and termination of derivatives, other
than forward commitments, are generally classified in investing activities. Cash flows related to forward commitments are
classified within the section of the consolidated statements of cash flows in accordance with the cash flows of the financial
instruments to which they relate.
REO
REO is initially recorded at fair value less costs to sell and is subsequently carried at the lower of cost or fair value less
costs to sell. When we acquire REO, losses arise when the recorded investment in the loan (including accrued interest) exceeds
the fair value of the foreclosed property, net of estimated costs to sell and expected recoveries through credit enhancements.
Losses are charged off against the allowance for loan losses at the time of REO acquisition. REO gains arise and are recognized
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