Fannie Mae 2006 Annual Report Download - page 240

that qualifies as a sale is completed, we derecognize all assets transferred. The previous carrying amount of
the transferred assets is allocated between the assets sold and the retained interests, if any, in proportion to
their relative fair values at the date of transfer. A gain or loss is recorded as a component of “Investment
losses, net” in the consolidated statements of income, which represents the difference between the allocated
carrying amount of the assets sold and the proceeds from the sale, net of any liabilities incurred, which may
include a recourse obligation for our financial guaranty. Retained interests are primarily in the form of Fannie
Mae MBS, REMIC certificates, guaranty assets and master servicing assets (“MSAs”). We separately
described the subsequent accounting, as well as how we determine fair value, for these retained interests in the
Investments in Securities,Guaranty Accounting, and Master Servicing sections of this note. If a portfolio
securitization does not meet the criteria for sale treatment, the transferred assets remain on the consolidated
balance sheets and we record a liability to the extent of any proceeds we received in connection with such
transfer.
Cash and Cash Equivalents and Statements of Cash Flows
Short-term highly liquid instruments with a maturity at date of acquisition of three months or less that are
readily convertible to known amounts of cash are considered cash and cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair value. Additionally, we may pledge cash equivalent
securities as collateral as discussed below. We record items that are specifically purchased as part of the liquid
investment portfolio as “Investments in securities” in the consolidated balance sheets in accordance with
SFAS No. 95, Statement of Cash Flows (“SFAS 95”).
We classify short-term U.S. Treasury Bills as “Cash and cash equivalents” in the consolidated balance sheets.
The carrying value of these securities, which approximates fair value, was $215 million and $795 million as of
December 31, 2006 and 2005, respectively.
The consolidated statements of cash flows are prepared in accordance with SFAS 95. In the presentation of the
consolidated statements of cash flows, cash flows from derivatives that do not contain financing elements,
mortgage loans held for sale, trading securities and guaranty fees, including buy-up and buy-down payments,
are included as operating activities. Federal funds sold and securities purchased under agreements to resell are
presented as investing activities, while federal funds purchased and securities sold under agreements to
repurchase are presented as financing activities. Cash flows related to dollar roll repurchase transactions that
do not meet the SFAS 140 requirements to be classified as secured borrowings are recorded as purchases and
sales of securities in investing activities, whereas cash flows related to dollar roll repurchase transactions
qualifying as secured borrowings pursuant to SFAS 140 are considered proceeds and repayments of short-term
debt in financing activities.
Restricted Cash
When we collect and hold cash that is due to certain mortgage-backed securities (“MBS”) trusts in advance of
our requirement to remit these amounts to the trust, we record the collected cash amount as “Restricted cash”
in the consolidated balance sheets. Additionally, we record “Restricted cash” as a result of partnership
restrictions related to certain consolidated partnership funds. As of December 31, 2006 and 2005, we had
“Restricted cash” of $612 million and $507 million, respectively, related to such activities. We also have
restricted cash related to certain collateral arrangements as described in the “Collateral” section of this note.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
We treat securities purchased under agreements to resell and securities sold under agreements to repurchase as
secured financing transactions when the transactions meet all of the conditions of a secured financing in
SFAS 140. We record these transactions at the amounts at which the securities will be subsequently reacquired
or resold, including accrued interest. When securities purchased under agreements to resell or securities sold
F-9
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)