Fannie Mae 2007 Annual Report Download - page 215

settled. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. We recognize investment and other tax credits through our effective tax rate
calculation assuming that we will be able to realize the full benefit of the credits. SFAS 109 also requires that
a deferred tax asset be reduced by an allowance if, based on the weight of available positive and negative
evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
Prior to 2007, we accounted for income tax uncertainty in accordance with the guidance of SFAS 5. Effective
January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income Taxes, and related FASB Staff
Positions (“FIN 48”) to account for income tax uncertainty.
FIN 48 uses a two-step approach in which income tax benefits are recognized if, based on the technical merits
of a tax position, it is more likely than not (a probability of greater than 50%) that the tax position would be
sustained upon examination by the taxing authority, which includes all related appeals and litigation process.
The amount of tax benefit recognized is then measured at the largest amount of tax benefit that is greater than
50% likely to be realized upon settlement with the taxing authority, considering all information available at
the reporting date.
Upon our adoption of FIN 48, we elected to recognize the accrued interest and penalties related to
unrecognized tax benefits as “Other expenses” in our consolidated statements of operations. Previously, such
amounts were recorded as a component of “Provision (benefit) for federal income taxes” in our consolidated
statements of operations.
Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123 (Revised), Share-Based Payments (“SFAS 123R”), and
the related FASB Staff Positions (“FSP”) that provide implementation guidance, using the modified
prospective method of transition. We also made the transition election provided by FSP SFAS 123R-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. Accordingly,
prior period amounts have not been restated. In accordance with this statement, we measure the cost of
employee services received in exchange for stock-based awards using the fair value of those awards on the
grant date.
We recognize compensation cost over the period during which an employee is required to provide service in
exchange for a stock-based award, which is generally the vesting period. For awards issued on or after
January 1, 2006, we recognize compensation cost for retirement-eligible employees immediately, and for those
employees who are nearing retirement, over the shorter of the vesting period or the period from the grant date
to the date of retirement eligibility. For unmodified grants issued prior to the adoption of SFAS 123R, we will
continue to recognize compensation costs for retirement-eligible employees over the stated vesting period.
We had previously adopted SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as of
January 1, 2003, using the prospective transition method. Under this standard, we accounted for new and
modified stock-based compensation awards at fair value on the grant date and recognized compensation cost
over the vesting period. However, under the prospective transition method, we continued to account for
unmodified stock-based awards that were outstanding as of December 31, 2002, using the intrinsic value
method of accounting provided by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for
Stock Issued to Employees (“APB 25”). Under the intrinsic value method, we did not recognize compensation
expense on such stock-based awards, except for grants deemed to be variable awards.
In accordance with the transition provisions of SFAS 123R, we began to recognize compensation cost
prospectively for the unvested stock options that had previously been accounted for under APB 25. We
measure this compensation cost beginning in 2006 as if we had previously amortized the fair value of the
unvested stock options at the grant date through December 31, 2005, and we record compensation cost only
for the remaining unvested portion of each award after January 1, 2006. Additionally, we recognized as
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)