Sallie Mae 2005 Annual Report Download - page 193

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)
F-71
18. Segment Reporting (Continued)
The adjustments required to reconcile from the Company’s “core earnings” measures to its GAAP
results of operations relate to differing treatments for securitization transactions, derivatives, floor income
related to the Company’s student loans, and certain other items that management does not consider in
evaluating the Company’s operating results. The following table reflects aggregate adjustments associated
with these areas for the years ended December 31, 2005, 2004, and 2003.
Years ended December 31,
2005 2004 2003
(Dollars in millions)
Segment reporting adjustments to GAAP:
Net impact of securitization accounting(1) ............... $ (60) $ (152) $ 300
Net impact of derivative accounting(2)................... 637 1,553 502
Net impact of Floor Income(3) ......................... (204) (156) 23
Amortization of acquired intangibles(4) ................. (61) (36) (27)
Net tax effect(5) ...................................... (61) (162) (320)
Cumulative effect of accounting change(6) ............... — — 130
Total segment reporting adjustments to GAAP.......... $ 251 $1,047 $ 608
(1) Securitization accounting: Under GAAP, certain securitization transactions in the Company’s Lending
segment are accounted for as sales of assets. Under the “core earnings” for the Lending segment, the
Company presents all securitization transactions on a Managed Basis as long-term non-recourse
financings. The upfront “gains” on sale from securitization transactions as well as ongoing “servicing
and securitization revenue” presented in accordance with GAAP are excluded from the “core
earnings” and replaced by the interest income, provisions for loan losses, and interest expense as they
are earned or incurred on the securitization loans. The Company also excludes transactions with its off-
balance sheet trusts from “core earnings” as they are considered intercompany transactions on a
Managed Basis.
(2) Derivative accounting: “Core earnings” exclude periodic unrealized gains and losses arising primarily
in the Company’s Lending business segment, and to a lesser degree in its Corporate and Other business
segment, that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by
SFAS No. 133 on derivatives that do not qualify for “hedge treatment” under GAAP. Under “core
earnings,” the Company recognizes the economic effect of these hedges, which generally results in any
cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life.
“Core earnings” also exclude the gain or loss on equity forward contracts that, under SFAS No. 133,
are required to be accounted for as derivatives and are marked-to-market through earnings.
(3) Floor income: The timing and amount (if any) of Floor Income earned in the Company’s Lending
segment is uncertain and in excess of expected spreads and, therefore, the Company excludes such
income from its “core earnings” when it is not economically hedged. The Company employs
derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As
discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting
hedges and therefore under GAAP are marked-to-market through the “gains (losses) on derivative and
hedging activities, net” line on the income statement with no offsetting gain or loss recorded for the
economically hedged items. For “core earnings” under the Lending segment, the Company reverses the
fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income