Fannie Mae 2005 Annual Report Download - page 255

Had compensation costs for all awards under our stock-based compensation plans been determined using the
fair value method required by SFAS 123, our net income available to common stockholders and earnings per
share would have been reduced to the pro forma amounts displayed in the table below.
2005 2004 2003
For the Year Ended
December 31,
(Dollars in millions, except
per share amounts)
Net income available to common stockholders, as reported . . . . . . . . . . . . . . . . . . $5,861 $4,802 $7,931
Plus: Stock-based employee compensation expense included in reported net
income, net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 68 74
Less: Stock-based employee compensation expense determined under fair value
based method, net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) (97) (123)
Pro forma net income available to common stockholders
(1)
. . . . . . . . . . . . . . . . . . $5,848 $4,773 $7,882
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.04 $ 4.95 $ 8.12
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.03 4.92 8.07
Diluted—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.01 $ 4.94 $ 8.08
Diluted—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.99 4.91 8.03
(1)
In the computation of proforma diluted EPS for 2005, the convertible preferred stock dividends of $135 million are
added back to proforma net income available to common stockholders since the assumed conversion of the preferred
shares is dilutive and assumed to be converted from the beginning of the period.
The fair value of the options granted under our stock-based compensation plans are estimated on the date of
the grant using a Black-Scholes model with the following weighted average assumptions displayed in the table
below.
2005
(1)
2004 2003
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.88% 2.52% 2.63%
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.80% 28.19% 29.37%
Dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.08 $ 1.56
Average expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 yrs 4 yrs 4 yrs
(1)
Excludes our Employee Stock Purchase Program Plus, which has a one year expected life, as it was not offered in
2005.
Pensions and Other Postretirement Benefits
We provide pension and postretirement benefits and account for these benefit costs on an accrual basis.
Pension and postretirement benefit amounts recognized in the consolidated financial statements are determined
on an actuarial basis using several different assumptions. The two most significant assumptions used in the
valuation are the discount rate and long-term rate of return on assets. In determining our net periodic benefit
expense, we apply a discount rate in the actuarial valuation of our pension and postretirement benefit
obligations. In determining the discount rate as of each balance sheet date, we consider the current yields on
high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected duration
of our benefit obligations. Additionally, the net periodic benefit expense recognized in the consolidated
financial statements for our qualified pension plan is impacted by the long-term rate of return on plan assets.
We base our assumption of the long-term rate of return on the current investment portfolio mix, actual long-
term historical return information and the estimated future long-term investment returns for each class of
assets. We measure plan assets and obligations as of the date of the consolidated financial statements.
F-26
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)