Freddie Mac 2014 Annual Report Download - page 162

157 Freddie Mac
immediately in earnings when the fair value of the foreclosed property less costs to sell plus expected recoveries through credit
enhancements exceeds the recorded investment in the loan (including all amounts due from the borrower).
Amounts we expect to receive from third-party insurance (primary mortgage insurance and pool insurance) and most
other credit enhancements are recorded as receivables when REO is acquired. The receivable is adjusted when the actual claim
is filed and is reported as a component of other assets on our consolidated balance sheets. We do not record receivables for
repurchase recoveries. We record these on a cash basis due to uncertainty of the timing and amount of collections.
Material development and improvement costs relating to REO are capitalized. Operating expenses specifically
identifiable with an REO property are included in REO operations income (expense) in our consolidated statements of
comprehensive income; all other expenses are recognized within other administrative expenses in our consolidated statements
of comprehensive income. Declines in the fair value of REO are provided for and charged to REO operations income
(expense). Any gains and losses from REO dispositions are included in REO operations income (expense).
Income Taxes
We use the asset and liability method of accounting for income taxes for financial reporting purposes. Under this method,
deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing temporary
differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax rates
as well as tax net operating loss and tax credit carryforwards. To the extent tax laws change, deferred tax assets and liabilities
are adjusted, when necessary, in the period that the tax change is enacted. Valuation allowances are recorded to reduce net
deferred tax assets when it is more likely than not that all or part of our tax benefits will not be realized. The realization of these
net deferred tax assets is dependent upon the generation of sufficient taxable income from current operations and from
unrecognized tax benefits.
Income tax benefit (expense) includes: (a) deferred tax benefit (expense), which represents the net change in the deferred
tax asset or liability balance during the year plus any change in a valuation allowance; and (b) current tax benefit (expense),
which represents the amount of tax currently payable to or receivable from a tax authority including any related interest and
penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and penalties). Income tax
benefit (expense) excludes the tax effects related to adjustments recorded to equity, such as unrealized gains and losses related
to available-for-sale securities.
Regarding tax positions taken or expected to be taken (and any associated interest and penalties), we recognize a tax
position so long as it is more likely than not that it will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest amount
of benefit that is greater than 50% likely of being realized upon ultimate settlement. See “NOTE 12: INCOME TAXES” for
additional information.
Earnings Per Common Share
The August 2012 amendment to the Purchase Agreement changed the manner in which the dividend on the senior
preferred stock is determined. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend
payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less
the applicable Capital Reserve Amount, exceeds zero. See "NOTE 11: STOCKHOLDERS' EQUITY — Senior Preferred
Stock" for additional information regarding the Capital Reserve Amount. For each quarter beginning January 1, 2018, the
dividend payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal
quarter exceeds zero. The dividend is presented in the period in which it is determinable for the senior preferred stock as a
reduction to net income (loss) available to common stockholders and net income (loss) per common share. The dividend is
declared and paid in the following period and recorded as a reduction to equity in the period declared.
We have participating securities related to options and restricted stock units with dividend equivalent rights that receive
dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses.
These participating securities consist of: (a) vested options to purchase common stock; and (b) vested and unvested restricted
stock units that earn dividend equivalents at the same rate when and as declared on common stock. Consequently, in
accordance with accounting guidance, we use the “two-class” method of computing earnings per common share. The “two-
class” method is an earnings allocation formula that determines earnings per share for common stock and participating
securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period
includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury
pursuant to the Purchase Agreement. These shares are included since the warrant is unconditionally exercisable by the holder at
a minimal cost. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for further information.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares
outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the
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