Freddie Mac 2015 Annual Report Download - page 226

Financial Statements Notes to the Consolidated Financial Statements | Note 3
Freddie Mac 2015 Form 10-K 224
NOTE 3: SECURITIZATION AND GUARANTEE ACTIVITIES
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the
securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue
beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the
principal and interest payments on some or all of the issued beneficial interests in substantially all of our
securitization transactions.
CONSOLIDATION OF VIEs AND ACCOUNTING FOR GUARANTEES
We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered
the primary beneficiary of the VIE. We are the primary beneficiary of a VIE when we have both the power
to direct the activities of the VIE that most significantly impact its economic performance and exposure to
losses or benefits of the VIE that could potentially be significant to the VIE. We evaluate whether we are
the primary beneficiary of VIEs in which we have interests on an ongoing basis, and our primary
beneficiary determination may change over time as our interest in the VIE changes.
When we consolidate a VIE, we recognize the assets and liabilities of the VIE on our consolidated
balance sheets and account for those assets and liabilities based on the applicable GAAP for each
specific type of asset or liability. Assets and liabilities that we transfer to a VIE at, after, or shortly before
the date we become the primary beneficiary of the VIE are initially measured at the same amounts that
they would have been measured if they had not been transferred, and no gain or loss is recognized on
these transfers. For all other VIEs that we consolidate, we recognize the assets and liabilities of the VIE
at fair value, and we recognize a gain or loss for the difference between:
• The sum of the fair value of the consideration paid, the fair value of any noncontrolling interests, and
the reported amount of any previously held interests; and
• The net fair value of the assets and liabilities recognized. Guarantees to consolidated VIEs are
eliminated in consolidation and are therefore not separately recognized on our consolidated balance
sheets.
When we provide, either to an unconsolidated VIE or to another third party, a guarantee that exposes us
to incremental credit risk, we recognize both a guarantee obligation at fair value and the consideration we
receive for providing the guarantee, which typically consists of a guarantee asset that represents the fair
value of future management and guarantee fees. As a practical expedient, the measurement of the fair
value of the guarantee obligation is set equal to the consideration we receive to provide the guarantee,
and no gain or loss is recognized upon issuance of the guarantee. Subsequently, we recognize changes
in the fair value of the guarantee asset in current period earnings and amortize the guarantee obligation
into earnings as we are released from risk under the guarantee. We also recognize a reserve for
guarantee losses when it is probable that a loss has been incurred under the guarantee.
The table below represents the carrying value and classification of the assets and liabilities of
consolidated VIEs on our consolidated balance sheets.