Fannie Mae 2004 Annual Report Download - page 132

presented in our consolidated financial statements reflect some financial assets measured and reported at fair
value while other financial assets, along with most of our financial liabilities, are measured and reported at
historical cost.
Each of the non-GAAP supplemental consolidated fair value balance sheets presented below in Table 24
reflects all of our assets and liabilities at estimated fair value. Estimated fair value is the amount at which an
asset or liability could be exchanged between willing parties, other than in a forced or liquidation sale. We
believe that the non-GAAP supplemental consolidated fair value balance sheets are useful to investors because
they provide consistency in the measurement and reporting of all of our assets and liabilities. Management
principally uses this information to gain a clearer picture of changes in our assets and liabilities from period to
period and to understand how the overall value of the company is changing from period to period.
Our consolidated fair value balance sheets include the following non-GAAP financial measures:
• the fair value of our other assets and our total assets;
• the fair value of our other liabilities and our total liabilities; and
• the fair value of our net assets.
These items are not defined terms within GAAP and may not be comparable to similarly titled measures
reported by other companies. The estimated fair value of our net assets (net of tax effect) presented in the
non-GAAP supplemental consolidated fair value balance sheets is not intended as a substitute for our
consolidated financial statements prepared in accordance with GAAP. We believe, however, that the non-
GAAP supplemental consolidated fair value balance sheets and the fair value of our net assets, when used in
conjunction with our consolidated financial statements prepared in accordance with GAAP, can serve as
valuable incremental tools for investors to assess changes in our overall value over time relative to changes in
market conditions.
Cautionary Language Relating to Supplemental Non-GAAP Financial Measures
In reviewing our non-GAAP supplemental consolidated fair value balance sheets, there are a number of
important factors and limitations to consider. The estimated fair value of our net assets is calculated as of a
particular point in time based on our existing assets and liabilities and does not incorporate other factors that
may have a significant impact on that value, most notably any value from future business activities in which
we expect to engage. As a result, the estimated fair value of our net assets presented in our non-GAAP
supplemental consolidated fair value balance sheets does not represent an estimate of our net realizable value,
liquidation value or our market value as a whole. Amounts we ultimately realize from the disposition of assets
or settlement of liabilities may vary significantly from the estimated fair values presented in our non-GAAP
supplemental consolidated fair value balance sheets. Because temporary changes in market conditions can
substantially affect the fair value of our net assets, we do not believe that short-term fluctuations in the fair
value of our net assets attributable to mortgage-to-debt OAS or changes in the fair value of our guaranty
business are necessarily representative of the effectiveness of our investment strategy or the long-term
underlying value of our business. We believe the long-term value of our business depends primarily on our
ability to acquire new assets and funding at attractive prices and to effectively manage the risks of these assets
and liabilities over time. However, we believe that focusing on the factors that affect near-term changes in the
estimated fair value of our net assets helps us evaluate our long-term value and assess whether temporary
market factors have caused our net assets to become overvalued or undervalued relative to the level of risk and
expected long-term fundamentals of our business.
In addition, as discussed in “Critical Accounting Policies and Estimates—Fair Value of Financial Instruments,”
when quoted market prices or observable market data are not available, we rely on internally developed
models that require management judgment and assumptions to estimate fair value. Differences in assumptions
used in our models could result in significant changes in our estimates of fair value.
127