Sallie Mae 2007 Annual Report Download - page 134

2. Significant Accounting Policies (Continued)
In connection with the Company’s tuition payment plan product, the Company receives cash from
students and parents that in turn is owed to schools. This cash, a majority of which has been deposited at
Sallie Mae Bank (the “Bank”), is held in escrow for the beneficial owners. In addition, the cash rebates that
Upromise members earn from qualifying purchases from Upromise’s participating companies are held in trust
for the benefit of the members. This cash is restricted to certain investments until distributed in accordance
with the Upromise member’s request and the terms of the Upromise service. Upromise, which acts as the
trustee for the trust, has deposited a majority of the cash with the Bank pursuant to a money market deposit
account agreement between the Bank and the trust. Subject to capital requirements and other laws, regulations
and restrictions applicable to Utah industrial banks, the cash that is deposited with the Bank in connection
with the tuition payment plan and the Upromise rebates described above is not restricted and, accordingly, is
not included in restricted cash and investments in the Company’s consolidated financial statements, as there is
no restriction surrounding the use of funds by the Company.
Securities pledged as collateral related to the Company’s derivative portfolio and not classified as
restricted (due to the counterparty not having rights of rehypothecation) are disclosed as such. Additionally,
the Company’s indentured trusts deposit cash balances in guaranteed investment contracts that are held in trust
for the related note holders and are classified as restricted investments. Finally, cash received from lending
institutions that is invested pending disbursement for student loans is restricted and cannot be disbursed for
any other purpose.
Investments
Investments are held to provide liquidity and to serve as a source of income. The majority of the
Company’s investments are classified as available-for-sale and such securities are carried at market value, with
the temporary changes in market value carried as a separate component of stockholders’ equity. Changes in
the market value for available-for-sale securities that have been designated as the hedged item in a
SFAS No. 133 fair value hedge (as it relates to the hedged risks) are recorded in the “gains (losses) on
derivative and hedging activities, net” line in the consolidated statements of income offsetting changes in fair
value of the 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
F-13
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise stated)