Sallie Mae 2005 Annual Report Download - page 139

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)
F-17
2. Significant Accounting Policies (Continued)
“trading” for GAAP purposes and as a result they are marked-to-market through GAAP earnings
with no consideration for the price fluctuation of the economically hedged item.
Net settlement income/expense on derivatives and realized gains/losses related to derivative
dispositions (“gains (losses) on derivative and hedging activities—realized,” as reported in Note 10
“Derivative Financial Instruments”) that do not qualify as hedges under SFAS No. 133 are included in the
“gains (losses) on derivative and hedging activities, net” line item on the income statement. As a result, the
“gains (losses) on derivative and hedging activities, net” line item includes the unrealized changes in the
fair value of the Company’s derivatives (except effective cash flow hedges which are recorded in other
comprehensive income), the unrealized changes in fair value of hedged items in qualifying fair value
hedges, as well as the realized changes in fair value related to derivative net settlements and dispositions
that do not qualify for hedge accounting. Net settlement income/expense on derivatives that qualify as
hedges under SFAS No. 133 are included with the income or expense of the hedged item (mainly interest
expense).
Foreign Currency Transactions
Transaction gains and losses resulting from exchange rate changes on transactions denominated in
currencies other than the functional currency are included in net income.
SFAS No. 150
Under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity,” equity forward contracts that allow a net settlement option either in cash or the
Company’s stock are required to be accounted for in accordance with SFAS No. 133 as derivatives. As a
result, the Company marks its equity forward contracts to market through earnings in the “gains (losses)
on derivative and hedging activities, net” line item on the income statement along with the net settlement
expense on the contracts. In accordance with SFAS No. 150, equity forward contracts that were entered
into prior to June 1, 2003 and outstanding at July 1, 2003, were marked-to-market on July 1, 2003 and
resulted in a gain of $130 million, which was reflected as a “cumulative effect of accounting change” in the
consolidated statements of income.
Debt Management Fees and Collections Revenue
In the purchased receivables business, the Company focuses on various types of consumer debt with
an emphasis on charged off credit card receivables, as well as sub-performing and nonperforming mortgage
loans. The Company accounts for its investments in charged off receivables and sub-performing and
nonperforming mortgage loans in accordance with AICPA Statement of Position (“SOP”) 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” Under the standard, the
Company establishes static pools of homogeneous accounts and initially records them at fair value, based
on each pool’s estimated cash flow and internal rate of return. The Company recognizes income each
month based on each static pool’s effective interest rate and allocates monthly cash collections to interest
and principal based on each pool’s estimated internal rate of return. The static pools are tested monthly for
impairment by re-estimating the future cash flows to be received from the pools. Subsequent increases in
estimated future cash flows are recognized prospectively through a yield adjustment over the remaining life
of the static pool. If the new estimated cash flows are less than previously estimated, the Company records