Freddie Mac 2014 Annual Report Download - page 206

201 Freddie Mac
In 2014, we revised our inter-segment allocations between the Multifamily and the Investments segments for the
Multifamily segment's investment securities and held-for-sale loans. As a result of this change, the Multifamily segment
reflects the entire change in fair value of these assets in its financial results, and the Investments segment transfers the change
in fair value of the derivatives associated with the Multifamily segment's investments securities and held-for-sale loans to the
Multifamily segment. The purpose of this change is to better reflect the operations of the Multifamily segment on a stand-alone
basis. Prior period results have been revised to conform with the current period presentation.
Many of the reclassifications, adjustments and allocations described below relate to the amendments to the accounting
guidance for transfers of financial assets and consolidation of VIEs, which we adopted effective January 1, 2010. These
amendments require us to consolidate our single-family PC trusts and certain Other Guarantee Transactions, which makes it
difficult to view the results of the three operating segments from a GAAP perspective. For example, as a result of the
amendments, the net guarantee fee earned on mortgage loans held by our consolidated trusts is included in net interest income
on our GAAP consolidated statements of comprehensive income. Through the reclassifications described below, we move the
net guarantee fees earned on mortgage loans into Segment Earnings management and guarantee income.
Credit Guarantee Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our credit-guarantee activities, including those described below. All credit guarantee-related income and costs
are included in Segment Earnings management and guarantee income.
• Net guarantee fee is reclassified in Segment Earnings from net interest income to management and guarantee income.
• Implied management and guarantee fee related to unsecuritized mortgage loans held in the mortgage investments
portfolio is reclassified in Segment Earnings from net interest income to management and guarantee income.
• The portion of the amount reversed for accrued but uncollected interest upon placing loans on a non-accrual status that
relates to guarantee fees is reclassified in Segment Earnings from net interest income to management and guarantee
income. The remaining portion of the allowance for lost interest is reclassified in Segment Earnings from net interest
income to provision for credit losses.
Investment Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our investment activities, including those described below. Through these reclassifications, we move certain
items into or out of net interest income so that, on a Segment Earnings basis, net interest income reflects how we measure the
effective yield earned on securities held in our mortgage investments portfolio and our cash and other investments portfolio.
We use derivatives extensively in our investment activity. The reclassifications described below allow us to reflect, in
Segment Earnings net interest income, the costs associated with this use of derivatives.
• The accrual of periodic cash settlements of all derivatives is reclassified in Segment Earnings from derivative gains
(losses) into net interest income to fully reflect the periodic cost associated with the protection provided by these
contracts.
• Up-front cash paid or received upon the purchase or writing of swaptions and other option contracts is reclassified in
Segment Earnings prospectively on a straight-line basis from derivative gains (losses) into net interest income over the
contractual life of the instrument to fully reflect the periodic cost associated with the protection provided by these
contracts.
Amortization related to certain items is not relevant to how we measure the effective yield earned on the securities held in
our investments portfolios. Therefore, as described below, we reclassify these items in Segment Earnings from net interest
income to non-interest income.
• Amortization related to derivative commitment basis adjustments associated with mortgage-related and non-mortgage-
related securities.
• Amortization related to accretion of other-than-temporary impairments on available-for-sale securities held.
• Amortization related to premiums and discounts associated with PCs and Other Guarantee Transactions issued by our
consolidated trusts that we previously held and subsequently transferred to third parties. The amortization is related to
deferred gains (losses) on transfers of these securities.
Segment Adjustments
In presenting Segment Earnings management and guarantee income and net interest income, we make adjustments to
better reflect how management measures and assesses the performance of each segment and the company as a whole. These
adjustments relate to amounts that are not reflected in net income (loss) as determined in accordance with GAAP. These
adjustments are reversed through the segment adjustments line item within Segment Earnings, so that Segment Earnings (loss)
for each segment equals GAAP net income (loss) for each segment. Segment adjustments consist of the following:
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