Fannie Mae 2006 Annual Report Download - page 259

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. 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.
In May 2007, the FASB issued FSP FIN 48-1, Definition of Settlement in FASB Interpretation 48 to provide
guidance on determining whether or not a tax position has been effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FIN 48 and FSP FIN 48-1 are effective for consolidated
financial statements beginning in the first quarter of 2007. The cumulative effect of applying the provisions of
FIN 48 upon adoption will be reported as an adjustment to beginning retained earnings. We are evaluating the
impact of adoption of FIN 48 and FSP 48-1 on the consolidated financial statements.
SFAS No. 157, Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157
provides enhanced guidance for using fair value to measure assets and liabilities and requires companies to
provide expanded information about assets and liabilities measured at fair value, including the effect of fair
value measurements on earnings. This statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances.
Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in which the reporting entity
transacts. This statement clarifies the principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability. In support of this principle, this standard establishes
a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable
data (for example, a company’s own data). Under this statement, fair value measurements would be separately
disclosed by level within the fair value hierarchy.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)