Fannie Mae 2006 Annual Report Download - page 257

The fair value of options granted under our stock-based compensation plans (none in 2006) are estimated on
the date of the grant using a Black-Scholes model with the following weighted average assumptions displayed
in the table below.
2005
(1)
2004
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.88% 2.52%
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.80% 28.19%
Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.08
Average expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 yrs 4 yrs
(1)
Excludes our Employee Stock Purchase Program Plus, which had a one year expected life, as it was not offered in
2005.
The risk-free interest rate within the contractual life of the option is based on the rate available on zero-
coupon government issues in effect at the time of the grant. The expected term of options is derived from
historical exercise behavior combined with possible option lives based on remaining contractual terms of
unexercised and outstanding options. The range of expected life results from certain groups of employees
exhibiting different behavior. Our stock-based compensation plans do not contain post-vesting restrictions.
Expected volatilities are based on implied volatilities from traded options on our stock, the historical volatility
of our stock and other factors. Dividend yield is based on actual dividend payments during the respective
periods shown.
Pensions and Other Postretirement Benefits
We provide pension and postretirement benefits and account for these benefit costs on an accrual basis.
Pension and postretirement benefit amounts recognized in the consolidated financial statements are determined
on an actuarial basis using several different assumptions. The two most significant assumptions used in the
valuation are the discount rate and long-term rate of return on assets. In determining our net periodic benefit
expense, we apply a discount rate in the actuarial valuation of our pension and postretirement benefit
obligations. In determining the discount rate as of each balance sheet date, we consider the current yields on
high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected duration
of our benefit obligations. Additionally, the net periodic benefit expense recognized in the consolidated
financial statements for our qualified pension plan is impacted by the long-term rate of return on plan assets.
We base our assumption of the long-term rate of return on the current investment portfolio mix, actual long-
term historical return information and the estimated future long-term investment returns for each class of
assets. We measure plan assets and obligations as of the date of the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”).
SFAS 158 requires the recognition of a plan’s over-funded or under-funded status as an asset or liability and
recognition of actuarial gains and losses and prior service costs and credits as an adjustment to accumulated
other comprehensive income, net of income tax. Additionally, it requires determination of benefit obligations
and the fair value of a plan’s assets at a company’s year-end. SFAS 158 is effective as of the end of the fiscal
year ending after December 15, 2006. We adopted SFAS 158 effective December 31, 2006 and recognized an
$80 million decrease in our consolidated statement of changes in stockholders’ equity for the year ended
December 31, 2006.
Earnings per Share
Earnings per share (“EPS”) are presented for both basic EPS and diluted EPS. Basic EPS is computed by
dividing net income available to common stockholders by the weighted average number of shares of common
stock outstanding during the year. Diluted EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock outstanding during the year, plus the
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)