Fannie Mae 2007 Annual Report Download - page 216

“Salaries and employee benefits” expense in the 2006 consolidated statements of operations an immaterial
cumulative effect of a change in accounting principle to estimate forfeitures at the grant date as required by
SFAS 123R rather than recognizing them as incurred. The recognition of this change had no impact on 2006
earnings per share. SFAS 123R also requires us to classify cash flows resulting from the tax benefit of tax
deductions in excess of their recorded share-based compensation expense as financing cash flows in the
consolidated statements of cash flows rather than within operating cash flows.
Had compensation costs for all awards under our stock-based compensation plans prior to January 1, 2006,
been determined using the provisions of SFAS 123, our net income available to common stockholders and
earnings per share for the year ended December 31, 2005, would have been reduced to the pro forma amounts
displayed in the table below. Following our adoption of SFAS 123R as of January 1, 2006, all awards are
recorded at fair value, thus the following disclosure is not required for periods subsequent to 2005.
For the Year Ended
December 31, 2005
(Dollars in millions,
except per share
amounts)
Net income available to common stockholders, as reported . . . . . . . . . . . . . . . . . . . . . . $5,861
Plus: Stock-based employee compensation expense included in reported net income, net
of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Less: Stock-based employee compensation expense determined under fair value based
method, net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35)
Pro forma net income available to common stockholders
(1)
. . . . . . . . . . . . . . . . . . . . . . $5,848
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.04
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.03
Diluted—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01
Diluted—pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.99
(1)
In the computation of pro forma diluted earnings per share for 2005, convertible preferred stock dividends of
$135 million are added back to pro forma net income available to common stockholders, since the assumed conversion
of the preferred shares is dilutive and assumed to be converted from the beginning of the period.
The fair value of options granted under our stock-based compensation plans for 2005 were estimated on the
date of the grant using a Black-Scholes model with the following weighted average assumptions: a risk-free
rate of 3.88%, volatility of 28.80%, a dividend of $1.70 and an average expected life of 6 years.
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 the historical volatility of our stock. 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 the long-term rate of return on assets. In determining our net periodic
benefit cost, we apply a discount rate in the actuarial valuation of our pension and postretirement benefit
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)