Fannie Mae 2006 Annual Report Download - page 252

operations are accounted for using the cost method. These investments are included as “Other assets” in the
consolidated balance sheets.
We periodically review our investments to determine if a loss in value that is other-than-temporary has
occurred. In these reviews, we consider all available information, including the recoverability of our
investment, the earnings and near-term prospects of the entity, factors related to the industry, financial and
operating conditions of the entity and our ability, if any, to influence the management of the entity.
Internally Developed Software
We incur costs to develop software for internal use. Certain direct development costs and software
enhancements associated with internal-use software are capitalized, including external direct costs of materials
and services, and internal labor costs directly devoted to these software projects under SOP 98-1, Accounting
for Costs of Computer Software Developed or Obtained for Internal Use. Such capitalized costs were
$130 million, $32 million and $40 million for the years ended December 31, 2006, 2005 and 2004,
respectively. We recognize an impairment charge on these capitalized costs when, during the development
stage of the project, we determine that the project is no longer probable of completion. No impairment charges
were recognized for 2006. For the years ended December 31, 2005 and 2004, we recognized impairment
charges of $7 million and $159 million, respectively. Capitalized costs are included as “Other assets” in the
consolidated balance sheets. Costs incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred.
Commitments to Purchase and Sell Mortgage Loans and Securities
We enter into commitments to purchase and sell mortgage-related securities and to purchase single-family and
multifamily mortgage loans. Commitments to purchase or sell some mortgage-related securities and to
purchase single-family mortgage loans are derivatives under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), as amended and interpreted. Our commitments to purchase
multifamily loans are not derivatives under SFAS 133 because they do not meet the criteria for net settlement.
For those commitments that we account for as derivatives, we report them in the consolidated balance sheets
at fair value in “Derivative assets at fair value” or “Derivative liabilities at fair value” and include changes in
their fair value in “Derivatives fair value gains (losses), net” in the consolidated statements of income. When
derivative purchase commitments settle, we include their fair value on the settlement date in the cost basis of
the security or loan that we purchase.
Regular-way securities trades provide for delivery of securities within the time generally established by
regulations or conventions in the market in which the trade occurs and are exempt from SFAS 133.
Commitments to purchase or sell securities that are accounted for on a trade-date basis are also exempt from
the requirements of SFAS 133. We record the purchase and sale of an existing security on its trade-date when
the commitment to purchase or sell the existing security settles within the period of time that is customary in
the market in which those trades take place.
Additionally, contracts for the forward purchase or sale of when-issued and TBA securities are exempt from
SFAS 133 if there is no other way to purchase or sell that security, delivery of that security and settlement
will occur within the shortest period possible for that type of security, and it is probable at inception and
throughout the term of the individual contract that physical delivery of the security will occur. Since our
commitments for the purchase of when-issued and TBA securities can be net settled and we do not document
that physical settlement is probable, we account for all such commitments as derivatives.
Commitments to purchase securities that we do not account for as derivatives and do not require trade-date
accounting are accounted for as forward contracts to purchase securities under the guidance of EITF Issue
No. 96-11, Accounting for Forward Contracts and Purchased Options to Acquire Securities Covered by FASB
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)