Fannie Mae 2004 Annual Report Download - page 263

significant change from our previously reported consolidated financial statements, as the majority of our
investments in securities were historically classified as HTM. As a part of our review of these transactions, we
identified the following additional errors: we incorrectly valued securities and we incorrectly classified certain
dollar roll repurchase transactions as short-term borrowings instead of purchases and sales of securities.
The restatement adjustments associated with these errors resulted in a pre-tax increase in net income of
$148 million and a decrease of $90 million for the years ended December 31, 2003 and 2002, respectively.
These restatement adjustments also impacted the consolidated balance sheets, resulting in an increase of
$2.4 billion and $6.1 billion in total assets and an increase of $37 million and decrease of $324 million in
total liabilities as of December 31, 2003 and 2002, respectively. Each of the errors that resulted in these
adjustments is described below.
We incorrectly classified securities as HTM pursuant to SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (“SFAS 115”). SFAS 115 requires that securities be classified based on
management’s investment intent on the date of acquisition and that securities originally designated as HTM
can only be reclassified if specified criteria are met. Previously, we selected HTM as a default designation on
the date we acquired the security. Subsequently, we would select classification as either HTM or AFS, at the
end of the month in which the security was acquired. The effect of this error was that securities were
incorrectly reclassified from HTM to AFS and the reclassification did not meet the criteria of SFAS 115 for
such reclassification. The impact of correcting this error resulted in the classification of all securities
previously classified as HTM securities as either AFS or trading securities, with changes in the fair value of
securities classified as AFS recorded in AOCI and changes in the fair value of securities classified as trading
recognized in “Investment losses, net” in the consolidated statements of income. We discontinued the use of
the HTM designation during the restatement period. In our restatement process, we corrected this error using
information contained within the historical trade system to determine the original investment intent for each
security and the appropriate classification. Fair value adjustments related to “Investments in securities” resulted
in an increase in AOCI of $2.3 billion and $6.4 billion for AFS securities as of December 31, 2003 and 2002,
respectively, in the consolidated balance sheets and an additional loss of $100 million and a gain of
$209 million for trading securities for the years ended December 31, 2003 and 2002, respectively, in
“Investment losses, net” in the consolidated statements of income.
We had valuation errors associated with securities. We incorrectly recorded the cost basis for certain securities
in connection with implementing a new settlement system in 2002. We also incorrectly accounted for certain
securities on a settlement date basis rather than a trade date basis pursuant to Statement of Position (“SOP”)
No. 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance
the Activities of Others (“SOP 01-6”). In addition, we incorrectly valued our previously reported AFS
securities. To correct these errors, we revalued securities and corrected the cost basis of the impacted
securities. The impact of correcting these errors resulted in a change in the realized and unrealized gains or
losses associated with these securities as well as amortization of the cost basis adjustments in “Interest
income” in the consolidated statements of income. The impact of the amortization of the revised cost basis
adjustments is reflected in the “Amortization of Cost Basis Adjustments” section below.
We enter into agreements referred to as “dollar roll repurchase transactions,” where we transfer mortgage-
backed securities (“MBS”) in exchange for funds and agree to repurchase substantially the same securities at a
future date. We incorrectly classified some dollar roll repurchase transactions as secured borrowings as these
repurchase transactions did not qualify for secured borrowing treatment under SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 125”) and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement
of FASB Statement No. 125) (“SFAS 140”). For transactions that did not qualify for secured borrowing
treatment, the impact of correcting the errors resulted in the reversal of “Short-term debt” in the consolidated
balance sheets and the recognition of a sale or purchase of a security for each transaction, resulting in the
recognition of gains and losses in “Investment losses, net” in the consolidated statements of income.
F-12
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)