Sallie Mae 2007 Annual Report Download - page 131

2. Significant Accounting Policies (Continued)
risks among parties involved. A VIE exists when either the total equity investment at risk is not sufficient to
permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Those characteristics are the direct or indirect ability to
make decisions about an entity’s activities that have a significant impact on the success of the entity, the
obligation to absorb the expected losses of an entity, and the rights to receive the expected residual returns of
the entity.
As further discussed in Note 9, “Student Loan Securitization,” the Company does not consolidate any
qualifying special purpose entities (“QSPEs”) created for securitization purposes in accordance with
SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities — a Replacement of SFAS No. 125.” All of the Company’s off-balance sheet securitizations meet
the definition of a QSPE and are not consolidated. The Company’s accounting treatment for its on-balance
sheet securitizations, which are not QSPEs, are governed by FIN No. 46(R) and are consolidated in the
accompanying financial statements as the Company is the primary beneficiary.
Use of Estimates
The Company’s financial reporting and accounting policies conform to generally accepted accounting
principles in the United States of America (“GAAP”). The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Key accounting policies that include significant judgments and estimates include valuation and
income recognition related to securitization activities (gain on sale and the related retained interest), loan
effective interest method (student loan premiums, discounts and Borrower Benefits), provisions for loan losses,
and derivative accounting.
Consolidation activity has a significant effect on a number of accounting estimates. Accordingly, the
Company has continually updated its estimates used to develop the cash flows and effective yield calculations
as they relate to the amortization of student loan premiums and discounts, Borrower Benefits and the valuation
and income recognition of the Residual Interest.
Loans
Loans, consisting of federally insured student loans, Private Education Loans, student loan participations,
lines of credit, academic facilities financings, and other private consumer and mortgage loans, are generally
carried at amortized cost, which includes unamortized premiums, unearned discounts and capitalized origina-
tion costs and fees.
If the Company has the ability and intent to hold loans for the foreseeable future, such loans are held for
investment and therefore carried at amortized cost. Any loans held for sale are carried at the lower of cost or
fair value. The Company actively securitizes loans but securitization is viewed as one of many different
sources of financing. At the time of a funding need, the most advantageous funding source is identified and, if
that source is the securitization program, loans are selected based on the required characteristics to structure
the desired transaction (e.g., type of loan, mix of interim vs. repayment status, credit rating, maturity dates,
etc.). The Company structures securitizations to obtain the most favorable financing terms and as a result, due
to some of the structuring terms, certain transactions qualify for sale treatment under SFAS No. 140 while
others do not qualify for sale treatment and are recorded as financings. All student loans are initially
categorized as held for investment until there is certainty as to each specific loan’s ultimate financing because
F-10
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise stated)