Sallie Mae 2008 Annual Report Download - page 134

2. Significant Accounting Policies (Continued)
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 fair 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 by considering several factors including the length of
time and extent to which the fair 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
fair 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 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 and are designated 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.
Transfer of Financial Assets
The Company accounts for the transfer of financial assets under SFAS No. 140, “Accounting and
Servicing of Financial Assets and Extinguishments of Liabilities.” The primary activity which falls under
SFAS No. 140 for the Company is securitization accounting which is further discussed below. The company’s
indentured trust debt, ABCP borrowings and ED Participation Program facility were accounted for as on-
balance sheet secured borrowings under SFAS No. 140 as the trusts were either not QSPEs and/or the
Company controlled the transferred assets. See “Securitization Accounting” below for further discussion on
the criteria assessed under SFAS No. 140 to determine whether a transfer of financial assets is a sale or a
secured borrowing.
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 under FIN No. 46(R), as the Company is the
primary beneficiary of the VIE. In all cases, irrespective of whether they qualify as sales under SFAS No. 140,
F-14
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)