Fannie Mae 2008 Annual Report Download - page 170

FIN 46R would replace the current consolidation model with a qualitative evaluation that requires
consolidation of an entity when the reporting enterprise both (a) has the power to direct matters which
significantly impact the activities and success of the entity, and (b) has exposure to benefits and/or losses that
could potentially be significant to the entity. If an enterprise is not able to reach a conclusion through the
qualitative analysis, it would then proceed to a quantitative evaluation. The proposed statements would be
effective for new transfers of financial assets and to all variable interest entities on or after January 1, 2010.
Under the FASB’s currently proposed rules, if we were required to consolidate the incremental assets and
liabilities, we would initially record these assets and liabilities at fair value. If the fair value of the
consolidated assets were substantially less than the fair value of the consolidated liabilities (which would be
the case under current market conditions), the amount of our stockholders’ deficit could increase significantly.
In January 2009, however, the FASB reached a tentative decision that the incremental assets and liabilities to
be consolidated upon adoption of the proposed statements should be recognized at their carrying values, as if
they had been consolidated at the inception of the entity or a subsequent reconsideration date. The FASB also
indicated that fair value would only be permitted if determining the carrying value is not practicable. This
tentative decision also could result in an increase in our stockholders’ deficit. In addition, the amount of
capital we are required to maintain could increase if we are required to consolidate incremental assets and
liabilities. Under certain circumstances, these changes could have a material adverse impact on our earnings,
financial condition and net worth, as we had over $2.4 trillion of assets held in QSPEs as of December 31,
2008. Since the proposed amendments to SFAS 140 and FIN 46R are not final, we are unable to predict the
specific impact that the amendments will have on our consolidated financial statements. See “Part 1—
Item 1A—Risk Factors” for a discussion of risks relating to changes in accounting pronouncements.
LIHTC Partnership Interests
In most instances, we are not the primary beneficiary of our LIHTC partnership investments, and therefore our
consolidated balance sheets reflect only our investment in the LIHTC partnership, rather than the full amount
of the LIHTC partnership’s assets and liabilities. For partnership investments where we have determined that
we are the primary beneficiary, we have consolidated these investments and recorded all of the LIHTC
partnership assets and liabilities in our consolidated balance sheets. The portion of these investments owned by
third parties is recorded in the consolidated balance sheets as an offsetting minority interest. Our investments
in LIHTC partnerships are included in our consolidated balance sheets in “Partnership investments.”
In cases where we are not the primary beneficiary of these investments, we account for our investments in LIHTC
partnerships by using the equity method of accounting or the effective yield method of accounting, as appropriate.
In each case, we record in the consolidated financial statements our share of the income and losses of the LIHTC
partnerships, as well as our share of the tax credits and tax benefits of the partnerships. Our share of the operating
losses generated by our LIHTC partnerships is recorded in the consolidated statements of operations under “Losses
from partnership investments.” Any tax credits or benefits associated with the operating losses from our LIHTC
partnerships are recognized in “Provision (benefit) for federal income taxes” in our consolidated statements of
operations. Because of our decision to establish a partial deferred tax asset valuation allowance against our net
deferred tax assets during 2008, we currently are not making any new LIHTC investments, other than pursuant to
commitments existing prior to 2008, and are recognizing in our consolidated statements of operations only a small
amount of tax benefits associated with the tax credits and net operating losses generated from these investments.
See “Critical Accounting Policies and Estimates—Deferred Tax Assets” for additional information.
Our LIHTC partnership investments totaled $6.3 billion as of December 31, 2008, compared with $8.1 billion
as of December 31, 2007. For additional information regarding our holdings in off-balance sheet limited
partnerships, refer to “Notes to Consolidated Financial Statements—Note 3, Consolidations.” Our risk
exposure relating to these LIHTC partnerships is limited to the amount of our investment and the possible
recapture of the tax benefits we have received from the partnership. Neither creditors of, nor equity investors
in, these LIHTC partnerships have any recourse to our general credit. To manage the risks associated with a
LIHTC partnership, we track compliance with the LIHTC requirements, as well as the property condition and
financial performance of the underlying investment throughout the life of the investment. In addition, we
evaluate the strength of the LIHTC partnership’s sponsor through periodic financial and operating assessments.
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