Fannie Mae 2009 Annual Report Download - page 382

guaranty to an unrelated party in a standalone arm’s-length transaction at the measurement date. We estimate
the fair value of the GO using our internal GO valuation models which calculate the present value of expected
cash flows based on management’s best estimate of certain key assumptions such as default rates, severity
rates and required rate of return. We further adjust the model values based on our current market pricing when
such transactions reflect credit characteristics that are similar to our outstanding GO. While the fair value of
the GO reflects all guaranty arrangements, the carrying value primarily reflects only those arrangements
entered into subsequent to our adoption of the current FASB guidance on guarantor’s accounting and
disclosure requirements for guarantees.
Fair Value Option
The FASB guidance on the fair value option for financial instruments allows companies the irrevocable option
to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities, and
requires that the difference between the carrying value before election of the fair value option and the fair
value of these instruments be recorded as an adjustment to beginning retained earnings in the period of
adoption on a contract-by-contract basis.
Fair Value Elections
The following is a discussion of the primary financial instruments for which we made fair value elections and
the basis for those elections.
Non-mortgage-related securities
We elected the fair value option for all non-mortgage-related securities, as these securities are held primarily
for liquidity risk management purposes. The fair value of these instruments reflects the most transparent basis
of reporting. Instruments which were held at adoption had an aggregate fair value of $8.8 billion and
$16.5 billion as of December 31, 2009 and 2008, respectively.
Prior to the adoption of the FASB guidance on the fair value option for financial instruments, these available-
for-sale securities were recorded at fair value in accordance with the FASB guidance on accounting for
investments in debt and equity securities, with changes in fair value recorded in AOCI. Following the election
of the fair value option, these securities were reclassified to “Trading securities” in our consolidated balance
sheets and are now recorded at fair value with subsequent changes in fair value recorded in “Fair value losses,
net” in our consolidated statements of operations.
Mortgage-related securities
We elected the fair value option for certain 15-year and 30-year agency mortgage-related securities that were
previously classified as available-for-sale securities in our mortgage portfolio. These securities were selected
for the fair value option primarily in order to reduce the volatility in earnings that results from accounting
asymmetry between our derivatives that are accounted for at fair value through earnings and our available-for-
sale securities that are accounted for at fair value through AOCI. Instruments which were held at adoption had
an aggregate fair value of $13.4 billion and $16.4 billion as of December 31, 2009 and 2008, respectively.
Prior to the adoption of the FASB guidance on the fair value option for financial instruments, these available-
for-sale securities were recorded at fair value in accordance with the FASB guidance on accounting for
investments in debt and equity securities with changes in fair value recorded in AOCI. Following the election
of the fair value option, these securities were reclassified to “Trading securities” in our consolidated balance
sheets and are now recorded at fair value with subsequent changes in fair value recorded in “Fair value losses,
net” in our consolidated statements of operations.
F-124
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)