Fannie Mae 2008 Annual Report Download - page 64

The dramatic changes in the housing, credit and capital markets have required frequent adjustments to our
models and the application of greater management judgment in the interpretation and adjustment of the results
produced by our models. This application of greater management judgment reflects the need to take into
account updated information while continuing to maintain controlled processes for model updates, including
model development, testing, independent validation, and implementation. As a result of the time and
resources, including technical and staffing resources, that are required to perform these processes effectively, it
may not be possible to replace existing models quickly enough to ensure that they will always properly
account for the impacts of recent information and actions.
If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk
management or business decisions, including decisions affecting loan purchases, management of credit losses
and risk, guaranty fee pricing, asset and liability management and the management of our net worth, and any
of those decisions could adversely affect our earnings, liquidity, net worth and financial condition.
Furthermore, any strategies we employ to attempt to manage the risks associated with our use of models may
not be effective.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial
condition and results of operations, require management to make judgments and estimates about matters
that are inherently uncertain. Management also may rely on the use of models in making estimates about
these matters.
Our accounting policies and methods are fundamental to how we record and report our financial condition and
results of operations. Our management must exercise judgment in applying many of these accounting policies
and methods so that these policies and methods comply with GAAP and reflect management’s judgment of the
most appropriate manner to report our financial condition and results of operations. In some cases,
management must select the appropriate accounting policy or method from two or more alternatives, any of
which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues
and expenses that we report. See “Notes to Consolidated Financial Statements—Note 2, Summary of
Significant Accounting Policies” for a description of our significant accounting policies.
We have identified four accounting policies as critical to the presentation of our financial condition and results
of operations. These accounting policies are described in “Part II—Item 7—MD&A—Critical Accounting
Policies and Estimates.” We believe these policies are critical because they require management to make
particularly subjective or complex judgments about matters that are inherently uncertain and because of the
likelihood that materially different amounts would be reported under different conditions or using different
assumptions. Due to the complexity of these critical accounting policies, our accounting methods relating to
these policies involve substantial use of models. Models are inherently imperfect predictors of actual results
because they are based on assumptions, including assumptions about future events. Our models may not
include assumptions that reflect very positive or very negative market conditions and, accordingly, our actual
results could differ significantly from those generated by our models. As a result, the estimates that we use to
prepare our financial statements, as well as our estimates of our future results of operations, may be
inaccurate, potentially significantly.
We may be required to establish an additional valuation allowance against our deferred tax assets, which
could materially adversely affect our results of operations, financial condition and net worth.
As of December 31, 2008, we had approximately $3.9 billion in net deferred tax assets on our consolidated
balance sheet related to unrealized losses recorded through accumulated other comprehensive income (loss)
(“AOCI”) on our available-for-sale securities as of December 31, 2008. Deferred tax assets refer to assets on
our consolidated balance sheet that are attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and to tax credits. The realization of
our deferred tax assets is dependent upon the generation of sufficient future taxable income.
As described in “Part II—Item 7—MD&A—Critical Accounting Policies and Estimates—Deferred Tax
Assets,” during the third quarter of 2008, we concluded it was more likely than not that we would not
59