Sallie Mae 2006 Annual Report Download - page 133

2. Significant Accounting Policies (Continued)
derivative which is hedging such investment. Temporary changes in market value of the security as it relates to
non hedged risks, are carried as a separate component of stockholders’ equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and accretion of discounts, which are
amortized using the effective interest rate method. Impairment is evaluated considering several factors
including the length of time and extent to which the market value has been less than cost; the financial
condition and near-term prospects of the issuer; and the intent and ability to retain the investment in order to
allow for an anticipated recovery in market value. If, based on the analysis, it is determined that the
impairment is other than temporary, the investment is written down to fair value and a loss is recognized
through earnings. Securities classified as trading are accounted for at fair market value with unrealized gains
and losses included in investment income. Securities that the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and are accounted for at amortized cost.
The Company also has investments in leveraged leases, primarily with U.S. commercial airlines, which
are accounted for at amortized cost net of impairments in other investments, and insurance-related investments
carried in other assets.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for the amortization of debt issuance
costs and premiums and the accretion of discounts. The Company’s interest expense may also be adjusted for
net payments/receipts related to interest rate and foreign currency swap agreements and interest rate futures
contracts that qualify as hedges under GAAP. Interest expense also includes the amortization of deferred gains
and losses on closed hedge transactions that qualified as cash flow hedges. Amortization of debt issue costs,
premiums, discounts and terminated hedge basis adjustments are recognized using the effective interest rate
method.
Securitization Accounting
To meet the sale criteria of SFAS No. 140, the Company’s securitizations use a two-step structure with a
QSPE that legally isolates the transferred assets from the Company, even in the event of bankruptcy.
Transactions receiving sale treatment are also structured to ensure that the holders of the beneficial interests
issued by the QSPE are not constrained from pledging or exchanging their interests, and that the Company
does not maintain effective control over the transferred assets. If these criteria are not met, then the transaction
is accounted for as an on-balance sheet secured borrowing. In all cases, irrespective of whether they qualify as
sales under SFAS No. 140, the Company’s securitizations are structured such that they are legally sales of
assets that isolate the transferred assets from the Company.
The Company assesses the financial structure of each securitization to determine whether the trust or
other securitization vehicle meets the sale criteria as defined in SFAS No. 140 and accounts for the transaction
accordingly. To be a QSPE, the trust must meet all of the following conditions:
• It is demonstrably distinct from the Company and cannot be unilaterally dissolved by the Company and
at least 10 percent of the fair value of its interests is held by independent third parties.
• The permitted activities in which the trust can participate are significantly limited. These activities are
entirely specified up-front in the legal documents creating the QSPE.
• There are limits to the assets the QSPE can hold; specifically, it can hold only financial assets
transferred to it that are passive in nature, passive derivative instruments pertaining to the beneficial
F-14
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)