Fannie Mae 2004 Annual Report Download - page 271

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Computation of interest income. We incorrectly calculated interest income on certain investments. The
calculations utilized a convention that was based on the average number of days of interest in a month
regardless of the actual number of days in the month. We corrected the calculation of interest using the
actual number of days in the month and adjusted the timing of interest income recognition.
Mortgage insurance contract. We entered into a mortgage insurance contract that did not transfer
sufficient underlying risk of economic loss to the insurer and therefore did not qualify as mortgage
insurance for accounting purposes. We incorrectly amortized the premiums paid as an expense. To correct
this error, we recorded premiums paid on the policy as a deposit, reducing such deposit as recoveries
from the policy were received.
Stock-based compensation. We made errors in the computation and classification of stock-based
compensation, including the misclassification of some awards as non-compensatory when they were
compensatory. The impact of correcting these errors resulted in the recognition of additional “Salaries and
employee benefits expense” in the consolidated statements of income, a decrease in “Other liabilities” and
an increase in Additional paid-in capital” in the consolidated balance sheets. None of these errors related
to awards that were not properly authorized and priced.
In addition to the specified errors listed and described above, we recognized other restatement adjustments
related to our revised accounting policies and practices. These adjustments, both individually and in the
aggregate, did not have a significant impact on the consolidated financial statements.
As a result of our restatement adjustments, our effective tax rate decreased from the previously reported 26%
to 24% for the year ended December 31, 2003 and from the previously reported 24% to 18% for the year
ended December 31, 2002. These decreases resulted from errors in our tax provision relating primarily to the
recognition of higher levels of tax credits from our investment in affordable housing projects and changes to
deferred tax balances. As a result, the change in the provision for federal taxes as a percentage of the change
in pre-tax income was higher than the statutory federal rate or our effective tax rate. See “Note 11, Income
Taxes” for our restated tax rate reconciliation. In addition, the tax effects were applied to each of the
categories identified above to display each error category net of tax and with the earnings per share impact.
In addition to the consolidated financial statement errors discussed above, we incorrectly applied the treasury
stock method in computing the weighted average shares pursuant to SFAS No. 128, Earnings per Share. This
resulted in a different number of weighted average dilutive shares outstanding being utilized in the earnings
per share calculation. While common stock outstanding has not been restated, diluted EPS has been
recalculated using the revised weighted average diluted shares.
We also identified errors in the presentation of business segments that were not in conformity with the
requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information
(“SFAS 131”). For further information on this error, see “Note 15, Segment Reporting.
We made errors in the fair value disclosure of financial instruments pursuant to SFAS No. 107, Disclosures
about Fair Value of Financial Instruments (“SFAS 107”), by incorrectly calculating the fair value of our
derivatives, commitments and AFS securities, as described above. In addition, we incorrectly calculated the
fair value of our guaranty assets and guaranty obligations, which affected the fair value of our whole loans.
We also incorrectly calculated the fair value of our HTM securities and debt. For our guaranty obligations we
did not appropriately consider an estimate of the return on capital required by a third party to assume our
liability. Correcting this error resulted in an increase in our guaranty obligations of approximately $1.2 billion
(net of tax) and a decrease in the fair value of our whole loans of approximately $200 million (net of tax).
This increase in the fair value of our guaranty obligations, coupled with other fair value changes made in
re-estimating the guaranty components, resulted in a decrease in the fair value of our net guaranty assets of
approximately $1.7 billion (net of tax) as of December 31, 2003. For our HTM securities, we did not
appropriately consider security characteristics and aggregation in developing our estimate of fair value.
Correcting these errors resulted in a reduction in the fair value of these assets of approximately $800 million
F-20
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)