Sallie Mae 2008 Annual Report Download - page 137

2. Significant Accounting Policies (Continued)
on an ongoing basis to determine if the amounts received are adequate compensation as defined in
SFAS No. 140. To the extent such compensation is determined to be no more or less than adequate
compensation, no servicing asset or obligation is recorded at the time of securitization. Servicing rights are
subsequently carried at the lower of cost or market. At December 31, 2008 and 2007, the Company did not
have servicing assets or liabilities recorded on the balance sheet.
Derivative Accounting
The Company accounts for its derivatives, which include interest rate swaps, cross-currency interest rate
swaps, interest rate futures contracts, interest rate cap contracts, Floor Income Contracts and equity forward
contracts in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
which requires that every derivative instrument, including certain derivative instruments embedded in other
contracts, be recorded at fair value on the balance sheet as either an asset or liability. Derivative positions are
recorded as net positions by counterparty based on master netting arrangements (see Note 9, “Derivative
Instruments,” under Risk Management Strategy) exclusive of accrued interest and cash collateral held or
pledged. The Company determines the fair value for its derivative contracts primarily using pricing models
that consider current market conditions and the contractual terms of the derivative contract. These factors
include interest rates, time value, forward interest rate curve, volatility factors, forward foreign exchange rates,
and the closing price of the Company’s stock (related to its equity forward contracts). Inputs are generally
from active financial markets; however, adjustments are made to derivative valuations for inputs from illiquid
markets, and for credit for both when the Company has an exposure to the counterparty net of collateral held
and when the counterparty has exposure to the Company net of collateral pledged. The fair values of some
derivatives are determined using counterparty valuations. Pricing models and their underlying assumptions
impact the amount and timing of unrealized gains and losses recognized with regard to derivatives, and the
use of different pricing models or assumptions could produce different financial results. As a matter of policy,
the Company compares the fair values of its derivatives that it calculates to those provided by its
counterparties. Any significant differences are identified and resolved appropriately.
Many of the Company’s derivatives, mainly interest rate swaps hedging the fair value of fixed rate assets
and liabilities, cross-currency interest rate swaps, and certain Eurodollar futures contracts, qualify as effective
hedges under SFAS No. 133. For these derivatives, the relationship between the hedging instrument and the
hedged items (including the hedged risk and method for assessing effectiveness), as well as the risk
management objective and strategy for undertaking various hedge transactions at the inception of the hedging
relationship, is documented. Each derivative is designated to either a specific asset or liability on the balance
sheet or expected future cash flows, and designated as either a “fair value” or a “cash flow” hedge. Fair value
hedges are designed to hedge the Company’s exposure to changes in fair value of a fixed rate or foreign
denominated asset or liability, while cash flow hedges are designed to hedge the Company’s exposure to
variability of either a floating rate asset’s or liability’s cash flows or an expected fixed rate debt issuance. For
effective fair value hedges, both the hedge and the hedged item (for the risk being hedged) are
marked-to-market with any difference reflecting ineffectiveness and recorded immediately in the statement of
income. For effective cash flow hedges, the change in the fair value of the derivative is recorded in other
comprehensive income, net of tax, and recognized in earnings in the same period as the earnings effects of the
hedged item. The ineffective portion of a cash flow hedge is recorded immediately through earnings. The
assessment of the hedge’s effectiveness is performed at inception and on an ongoing basis, generally using
regression testing. When it is determined that a derivative is not currently an effective hedge, ineffectiveness is
recognized for the full change in value of the derivative with no offsetting mark-to-market of the hedged item
for the current period. If it is also determined the hedge will not be effective in the future, the Company
F-17
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)