Fannie Mae 2004 Annual Report Download - page 77

Restatement of Prior Consolidated Financial Statements. Our restatement process began in December 2004.
Due to the significant complexities associated with our restatement and the lack of effective internal control
over financial reporting, the restatement process has required an extensive effort by thousands of financial and
accounting professionals, including both employees and external consultants. The restatement process has
included thoroughly and comprehensively reviewing our accounting policies and practices to ensure
compliance with GAAP; implementing revised accounting policies; obtaining and/or validating market values
for our various financial instruments at multiple points in time over the restatement period; and enhancing or
developing new systems to track, value and account for our transactions. Beyond the initial errors identified by
our regulators, we also identified additional errors in our accounting and a substantial number of material
weaknesses in our internal control over financial reporting, including a material weakness relating to our
application of GAAP. See “Item 9A—Controls and Procedures” for a description of these material weaknesses,
as well as our remediation activities relating to these material weaknesses.
We have restated our previously reported audited consolidated financial statements for the years ended
December 31, 2003 and 2002, as well as our unaudited consolidated financial statements for the quarters
ended March 31, 2004 and June 30, 2004. We have also restated our previously reported December 31, 2001
balance sheet to reflect corrected items that relate to prior periods. As described in more detail below, the
cumulative impact of the restatement adjustments resulted in:
• a net decrease in retained earnings of $6.3 billion as of June 30, 2004;
• a net increase in stockholders’ equity of $4.1 billion as of June 30, 2004; and
• a net decrease in regulatory core capital of $7.5 billion as of December 31, 2003.
Stockholders’ equity increased despite a decrease in retained earnings. This was because AOCI restatement
adjustments were significantly higher than retained earnings restatement adjustments. Our restatement
adjustments resulted in an increase in AOCI of $10.4 billion, a decrease in retained earnings of $6.3 billion
and an increase of $91 million in other equity changes as of June 30, 2004. The most significant causes of the
$10.4 billion AOCI adjustments were the reversal of previously recorded derivative cash flow hedge
adjustments and the recognition of fair value adjustments on available-for-sale securities that were previously
classified as held-to-maturity securities and recorded at amortized cost. The most significant cause of the
$6.3 billion retained earnings adjustments was the recognition in income of fair value adjustments associated
with derivatives due to the loss of hedge accounting.
Overall Impact
The overall impact of our restatement was a total reduction in retained earnings of $6.3 billion through
June 30, 2004. This amount includes:
• a $7.0 billion net decrease in earnings for periods prior to January 1, 2002 (as reflected in beginning
retained earnings as of January 1, 2002);
• a $705 million net decrease in earnings for the year ended December 31, 2002;
• a $176 million net increase in earnings for the year ended December 31, 2003; and
• a $1.2 billion net increase in earnings for the six months ended June 30, 2004.
We previously estimated that errors in accounting for derivative instruments, including mortgage commitments,
would result in a total of $10.8 billion in after-tax cumulative losses through December 31, 2004. In a
subsequent 12b-25 filing in August 2006, we confirmed our estimate of after-tax cumulative losses on
derivatives of $8.4 billion, but disclosed that our previous estimate of $2.4 billion in after-tax cumulative
losses on mortgage commitments would be significantly less. We did not provide estimates of the effects on
net income or retained earnings of any other accounting errors, nor did we provide any estimates of the effects
of our restatement on total assets, total liabilities or stockholders’ equity. As reflected in the results we are
reporting in this Annual Report on Form 10-K, our retained earnings as of December 31, 2004 includes after-
tax cumulative losses on derivatives of $8.4 billion and after-tax cumulative net gains on derivative mortgage
commitments of $535 million, net of related amortization, for a total after-tax cumulative impact as of
72