Fannie Mae 2004 Annual Report Download - page 84

The restatement adjustments associated with these errors resulted in a cumulative pre-tax decrease in retained
earnings of $1.5 billion and a decrease in total assets of $1.2 billion as of December 31, 2003. Additionally,
for the six-month period ended June 30, 2004, we recorded a pre-tax increase in net income of $233 million,
resulting from the reversal of historical impairment charges that were recorded in 2003 in the restated financial
statements. 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.
For the six-month period ended June 30, 2004, we recorded a pre-tax decrease in net income of $142 million
related to the accounting errors described above. In combination with the effect of these errors through
December 31, 2003 discussed above, the cumulative impact of the restatement of these errors on our
consolidated financial statements was to decrease retained earnings by $1.8 billion as of June 30, 2004. The
decrease in net income in the six-month period ended June 30, 2004 was primarily the result of reversal of the
held-to-maturity classification, as the remaining errors described above had minimal impact on restated results
for the six-month period.
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 cumulative pre-tax decrease in retained
earnings of $166 million as of December 31, 2003. 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 resulted in an increase of $8.9 billion in total assets and an increase of
$8.6 billion in total liabilities as of December 31, 2003. 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.
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