Freddie Mac 2015 Annual Report Download - page 265

Financial Statements Notes to the Consolidated Financial Statements | Note 8
Freddie Mac 2015 Form 10-K 263
NOTE 8: 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
elect to measure newly acquired or issued financial instruments that contain embedded derivatives at fair
value, with changes in fair value recorded in earnings.
At December 31, 2015 and 2014, 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. Amounts reclassified from AOCI linked to interest payments on other
debt are recorded in other debt interest expense and amounts not linked to interest payments on other
debt are recorded in expense related to derivatives. In the years ended December 31, 2015 and 2014, we
reclassified from AOCI into earnings, losses of $230 million and $303 million, respectively, related to
closed cash flow hedges. See Note 10 for information about future reclassifications of deferred net losses
related to closed cash flow hedges to net income.
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.
USE OF DERIVATIVES
We use derivatives primarily to hedge interest-rate sensitivity mismatches between our financial assets
and liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis
across a variety of interest-rate scenarios based on market prices, models and economics. When we use
derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to
counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories:
• Exchange-traded derivatives;
• Cleared derivatives; and
• OTC derivatives.