Fannie Mae 2005 Annual Report Download - page 173

and Equity Securities. SFAS 155 is a prospective standard and had no impact on the consolidated financial
statements on the date of adoption.
SFAS No. 156, Accounting for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,an amendment
of FASB Statement No. 133 and 140 (“SFAS 156”). SFAS 156 modifies SFAS 140 by requiring that mortgage
servicing rights (“MSRs”) be initially recognized at fair value and by providing the option to either (i) carry
MSRs at fair value with changes in fair value recognized in earnings or (ii) continue recognizing periodic
amortization expense and assess the MSRs for impairment as was originally required by SFAS 140. This
option is available by class of servicing asset or liability. This statement also changes the calculation of the
gain from the sale of financial assets by requiring that the fair value of servicing rights be considered part of
the proceeds received in exchange for the sale of the assets.
SFAS 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the
beginning of a fiscal year that begins after September 15, 2006, with early adoption permitted. We adopted
SFAS 156 effective January 1, 2007, with no material impact to the consolidated financial statements. We do
not believe SFAS 156 will have a material effect on the consolidated financial statements, because we do not
intend to measure MSRs at fair value subsequent to their initial recognition.
FIN 48, Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48
supplements SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), by defining a threshold for
recognizing tax benefits in the consolidated financial statements.
FIN 48 provides a two-step approach to recognizing and measuring tax benefits when a benefit’s realization is
uncertain. First, we must determine whether the benefit is to be recognized and then the amount to be
recognized. Income tax benefits should be recognized when, based on the technical merits of a tax position,
we believe that if upon examination, including resolution of any appeals or litigation process, it is more likely
than not (a probability of greater than 50%) that the tax position would be sustained as filed. The benefit
recognized for a tax position that meets the more-likely-than-not criterion is measured based on the largest
amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the taxing
authority, taking into consideration the amounts and probabilities of the outcomes upon settlement.
In March 2007, FSP FIN 48-a, Definition of Settlement in FASB Interpretation 48 (“FSP FIN 48-a”), was
proposed by the FASB. The objective of FSP FIN 48-a is to replace the term “ultimate settlement,” originally
introduced in FIN 48, with the term “effective settlement” and to provide guidance to determine whether or
not a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.
Final guidance of FSP FIN 48-a is expected in the second quarter of 2007 with an effective date that coincides
with that of FIN 48.
FIN 48 is effective for consolidated financial statements beginning in the first quarter of 2007. The cumulative
effect of applying the provisions of FIN 48 upon adoption will be reported as an adjustment to beginning
retained earnings. We are evaluating the impact of the adoption of FIN 48 and FSP FIN 48-a on the
consolidated financial statements.
SFAS No. 157, Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157
provides enhanced guidance for using fair value to measure assets and liabilities and requires companies to
provide expanded information about assets and liabilities measured at fair value, including the effect of fair
value measurements on earnings. This statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances.
Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in which the reporting entity
transacts. This statement clarifies the principle that fair value should be based on the assumptions market
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