Fannie Mae 2005 Annual Report Download - page 257

While an SOP 03-3 loan is on nonaccrual, no yield is accreted to interest income. The amount of yield to be
accreted is not displayed in the consolidated balance sheets. Subsequent increases in estimated future cash
flows to be collected are recognized prospectively in interest income through a yield adjustment over the
remaining contractual life of the loan. Decreases in estimated future cash flows to be collected are recognized
as impairment expense through a valuation allowance. For the year ended December 31, 2005 we recorded a
charge to the “Reserve for guaranty losses” of $251 million in connection with our purchase of loans
accounted for under SOP 03-3.
SFAS No. 123R, Share-Based Payment and SAB No. 107
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), which revises
SFAS 123 and supersedes APB 25 and its related implementation guidance. SFAS 123R eliminates the
alternative of applying the intrinsic value measurement provisions of APB 25 to stock compensation awards
issued to employees. Rather, SFAS 123R requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. With respect to
options, SFAS 123R requires that they be measured at fair value using an option-pricing model that takes into
account the options’ unique characteristics and recognition of the cost as expense over the period the employee
provides services to earn the award, which is generally the vesting period. Also, SFAS 123R requires that
excess tax benefits be classified as a financing cash inflow in the consolidated statements of cash flows.
This standard includes measurement requirements for employee stock options that are similar to those under
the fair value-based method of SFAS 123; however, SFAS 123R requires initial and ongoing estimates of the
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 the 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.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)