Fannie Mae 2006 Annual Report Download - page 241

under agreements to repurchase do not meet all of the conditions of a secured financing, we account for the
transactions as purchases or sales, respectively.
Investments in Securities
Securities Classified as Available-for-Sale or Trading
We classify and account for our securities as either available-for-sale (“AFS”) or trading in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Currently, we
do not have any securities classified as held-to-maturity, although we may elect to do so in the future. AFS
securities are measured at fair value in the consolidated balance sheets, with unrealized gains and losses
included in “Accumulated other comprehensive income” (“AOCI”). Trading securities are measured at fair
value in the consolidated balance sheets with unrealized gains and losses included in “Investment losses, net”
in the consolidated statements of income. Realized gains and losses on AFS and trading securities are
recognized when securities are sold; are calculated based upon the specific cost of each security; and are
recorded in “Investment losses, net” in the consolidated statements of income. Interest and dividends on
securities, including amortization of the premium and discount at acquisition, are included in the consolidated
statements of income. A description of our amortization policy is included in the “Amortization of Cost Basis
and Guaranty Price Adjustments” section of this note. When we receive multiple deliveries of securities on the
same day that are backed by the same pools of loans, we calculate the specific cost of each security as the
average price of the trades that delivered those securities.
Fair value is determined using quoted market prices in active markets for identical assets or liabilities, when
available. If quoted market prices in active markets for identical assets or liabilities are not available, we use
quoted market prices for similar securities that we adjust for observable or corroborated (i.e., information
purchased from third-party service providers) market information. In the absence of observable or corroborated
market data, we use internally developed estimates, incorporating market-based assumptions wherever such
information is available.
Interest Income and Impairment on Certain Beneficial Interests
We account for purchased and retained beneficial interests in securitizations in accordance with Emerging
Issues Task Force (“EITF”) Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests that Continue to be held by a Transferor in Securitized Financial
Assets (“EITF 99-20”) when such beneficial interests carry a significant premium or are not of high credit
quality (i.e., they have a rating below AA) at inception. We recognize the excess of all cash flows attributable
to our beneficial interests estimated at the acquisition date over the initial investment amount (i.e., the
accretable yield) as interest income over the life of those beneficial interests using the prospective interest
method. We continue to estimate the projected cash flows over the life of those beneficial interests for the
purposes of both recognizing interest income and evaluating impairment. We recognize an other-than-
temporary impairment in the period in which the fair value of those beneficial interests has declined below
their respective previous carrying amounts and an adverse change in our estimated cash flows has occurred. To
the extent that there is not an adverse change in expected cash flows related to our beneficial interests, but the
fair values of such beneficial interests have declined below their respective previous carrying amounts, we
qualitatively assess them for other-than-temporary impairment pursuant to SFAS 115.
Other-Than-Temporary Impairment
We evaluate our investments for other-than-temporary impairment at least quarterly in accordance with
SFAS 115 and other related guidance, including SEC Staff Accounting Bulletin Topic 5M, Other Than
Temporary Impairment of Certain Investments in Debt and Equity Securities. We consider an investment to be
other-than-temporarily impaired if its estimated fair value is less than its amortized cost and we have
F-10
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)