Fannie Mae 2006 Annual Report Download - page 165

IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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 measurement 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 115. 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. 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 because
we are not electing to measure MSRs at fair value subsequent to their initial recognition.
FIN 48, Accounting for Uncertainty in Income Taxes and FSP FIN 48-1 Definition of Settlement in
FASB Interpretation 48
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48
supplements 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.
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