Fannie Mae 2005 Annual Report Download - page 172

amount of shares that will vest while SFAS 123 provided entities the option of assuming that all shares would
vest and then recognizing actual forfeitures as they occur. SFAS 123R also clarifies and expands the guidance
in SFAS 123 regarding classification of an award as equity or as a liability.
Additionally, SEC Staff Accounting Bulletin 107, Share-Based Payment, provides guidance related to the
interaction between SFAS 123R and certain SEC rules and regulations, as well as the staff’s views regarding
the valuation of share-based payment arrangements.
SFAS 123R is effective for annual periods beginning after June 15, 2005 and allows use of the modified
prospective application method to be applied to new awards, unvested awards and to awards modified,
repurchased or cancelled after the effective date. We prospectively adopted the fair value expense recognition
provisions of SFAS 123 effective January 1, 2003, using a model to estimate the fair value of the majority of
our stock awards. We adopted SFAS 123R effective January 1, 2006 with no material impact to the
consolidated financial statements.
SFAS No. 154, Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”),
which replaces APB Opinion No. 20, Accounting Changes (“APB 20”) and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions.
APB 20 requires that the cumulative effect of most voluntary changes in accounting principles be included in
net income in the period of adoption. The new statement requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle, unless it is impracticable to determine
either period-specific effects or the cumulative effect of the change. In addition, SFAS 154 requires that we
account for a change in method of depreciation, amortization or depletion for long-lived, non-financial assets
as a change in accounting estimate that is effected by a change in accounting principle. APB 20 previously
required that we report such a change as a change in accounting principle.
SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS 154 effective January 1, 2006 had no impact on the consolidated
financial statements.
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments and DIG Issue No. B40, Embedded
Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments
(“SFAS 155”), an amendment of SFAS 133 and SFAS 140. This statement: (i) clarifies which interest-only
strips and principal-only strips are not subject to SFAS 133; (ii) establishes a requirement to evaluate interests
in securitized financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that
concentration of credit risks in the form of subordination are not embedded derivatives; and (iv) permits fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation.
In January 2007, FASB issued Derivatives Implementation Group (“DIG”) Issue No. B40 (“DIG B40”). The
objective of DIG B40 is to provide a narrow scope exception to certain provisions of SFAS 133 for securitized
interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying
financial assets. SFAS 155 and DIG B40 are effective for all financial instruments acquired or issued after the
beginning of the first fiscal year that begins after September 15, 2006. We adopted SFAS 155 effective
January 1, 2007 and elected fair value remeasurement for hybrid financial instruments that contain embedded
derivatives that otherwise require bifurcation, which includes buy-ups and guaranty assets arising from
portfolio securitization transactions. We also elected to classify investment securities that may contain
embedded derivatives as trading securities under SFAS No. 115, Accounting for Certain Investments in Debt
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