Fannie Mae 2004 Annual Report Download - page 264

Impairment of Securities
We identified the following errors associated with the impairment of securities: we did not assess certain types
of securities for impairment and we did not assess interest-only securities and lower credit quality investments
for impairment.
The restatement adjustments associated with these errors resulted in a pre-tax decrease in net income of
$480 million and $625 million and a decrease in total assets of $1.2 billion and $872 million for the years
ended December 31, 2003 and 2002, respectively. Each of the errors that resulted in these adjustments is
described below.
We did not appropriately assess certain securities for impairment due to deteriorated credit quality of the
securities’ underlying collateral and, in some cases, deteriorated credit quality of the securities’ issuer during
the restatement period. Included in this population of securities were investments in manufactured housing
bonds. Additionally, when we recorded impairment, in certain circumstances we did not use contemporaneous
market prices where available. To correct these errors, we remeasured securities and assessed them for credit-
related impairments. The impact of correcting these errors resulted in a change in the carrying amount of these
securities in the consolidated balance sheets and a reduction in net income recorded in “Investment losses,
net” in the consolidated statements of income.
We did not assess interest-only securities and lower credit quality investments for impairment pursuant to
EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (“EITF 99-20”).
In certain instances, we incorrectly combined interest-only and principal-only certificates issued from
securitization trusts for impairment evaluation purposes even though the interest-only certificates could not be,
or had not been, legally combined into a single security. To correct this error, we assessed these securities
separately for impairment. The impact of correcting this error resulted in a decrease in the carrying amount of
these securities in the consolidated balance sheets and a reduction in net income recorded in “Investment
losses, net” in the consolidated statements of income.
MBS Trust Consolidation and Sale Accounting
We identified three errors associated with MBS trust consolidation and sale accounting: we incorrectly
recorded asset sales that did not meet sale accounting criteria; we did not consolidate certain MBS trusts that
were not considered qualifying special purpose entities (“QSPE”) and for which we were deemed to be the
primary beneficiary or sponsor of the trust; and we did not consolidate certain MBS trusts in which we owned
100% of the securities issued by the trust and had the ability to unilaterally cause the trust to liquidate.
The restatement adjustments associated with these errors resulted in a pre-tax decrease in net income of
$226 million and $59 million for the years ended December 31, 2003 and 2002, respectively. This was the
result of the net change in the value of the assets and liabilities that were recognized and derecognized in
conjunction with consolidation or sale activity. These restatement adjustments also affected the consolidated
balance sheets, resulting in an increase of $8.9 billion and $7.7 billion in total assets and an increase in total
liabilities of $8.6 billion and $7.1 billion as of December 31, 2003 and 2002, respectively. Each of the errors
that resulted in these adjustments is described below.
We incorrectly recorded asset sales that did not meet the sale accounting criteria set forth in SFAS 125 and
SFAS 140, primarily because the assets were transferred to an MBS trust that did not meet the QSPE criteria.
To correct this error, we reviewed our MBS trusts and accounted for the transfers of assets that did not meet
the sale accounting criteria as secured borrowings. The impact of correcting this error resulted in the
derecognition of retained interest and recourse obligations recorded upon transfer of the assets, the
re-recognition of the transferred assets and the recognition of “Short-term debt” or “Long-term debt” in the
consolidated balance sheets to the extent of any proceeds received in connection with the transfer of assets.
Correcting this error also resulted in the reversal of any gains or losses related to these failed asset sales
recorded in “Investment losses, net” in the consolidated statements of income.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)