Sallie Mae 2010 Annual Report Download - page 124

2. Significant Accounting Policies (Continued)
a specific (or pool of) asset(s) or liability(ies) 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 our
exposure to changes in fair value of a fixed rate or foreign denominated asset or liability, while cash flow
hedges are designed to hedge our 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. For hedges of a pool of assets or liabilities, tests
are performed to demonstrate the similarity of individual instruments of the pool. 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, we discontinue the hedge accounting prospectively, cease
recording changes in the fair value of the hedged item, and begin amortization of any basis adjustments that
exist related to the hedged item.
We also have derivatives, primarily Floor Income Contracts and certain basis swaps, that we believe are
effective economic hedges but do not qualify for hedge accounting treatment. These derivatives are classified
as “trading” and as a result they are marked-to-market through earnings with no consideration for the fair
value fluctuation of the economically hedged item.
The “gains (losses) on derivative and hedging activities, net” line item in the consolidated statements of
income includes the unrealized changes in the fair value of our derivatives (except effective cash flow hedges
which are recorded in other comprehensive income), the unrealized changes in fair value of hedged items in
qualifying fair value hedges, as well as the realized changes in fair value related to derivative net settlements
and dispositions that do not qualify for hedge accounting. Net settlement income/expense on derivatives that
qualify as hedges are included with the income or expense of the hedged item (mainly interest expense).
Servicing Revenue
Servicing revenue includes third-party loan servicing, account asset servicing, Campus Payment Solutions
and Guarantor servicing revenue.
We perform loan servicing functions for third-parties in return for a servicing fee. Our compensation is
typically based on a per-unit fee arrangement or a percentage of the loans outstanding. We recognize servicing
revenues associated with these activities based upon the contractual arrangements as the services are rendered.
We recognize late fees and forbearance fees on third party serviced loans as well as on loans in our portfolio
according to the contractual provisions of the promissory notes, as well as our expectation of collectability.
Our Upromise subsidiary has a number of programs that encourage consumers to save for the cost of
college education. We have established a consumer savings network which is designed to promote college
savings by consumers who are members of this program by encouraging them to purchase goods and services
from the companies that participate in the program (“Participating Companies”). Participating Companies
generally pay Upromise fees based on member purchase volume, either online or in stores depending on the
contractual arrangement with the Participating Company. We recognize revenue as marketing and administra-
tive services are rendered based upon contractually determined rates and member purchase volumes.
F-21
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)