Fannie Mae 2009 Annual Report Download - page 77

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read in conjunction with our consolidated financial statements as of December 31, 2009 and related
notes, and with “Business—Executive Summary.” This discussion contains forward-looking statements that are
based upon management’s current expectations and are subject to significant uncertainties and changes in
circumstances. Please review “Business—Forward-Looking Statements” for more information on the forward-
looking statements in this report and “Risk Factors” for a discussion of factors that could cause our actual
results to differ, perhaps materially, from our forward-looking statements. Please also see “MD&A—Glossary
of Terms Used in This Report.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of
judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and
expenses in the consolidated financial statements. Understanding our accounting policies and the extent to
which we use management judgment and estimates in applying these policies is integral to understanding our
financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant
Accounting Policies.”
We have identified three of our accounting policies as critical because they involve significant judgments and
assumptions about highly complex and inherently uncertain matters, and the use of reasonably different
estimates and assumptions could have a material impact on our reported results of operations or financial
condition. These critical accounting policies and estimates are as follows:
• Fair Value Measurement
• Other-Than-Temporary Impairment of Investment Securities
• Allowance for Loan Losses and Reserve for Guaranty Losses
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and
update them as necessary based on changing conditions. Management has discussed any significant changes in
judgments and assumptions in applying our critical accounting policies with the Audit Committee of the
Board of Directors. We rely on a number of valuation and risk models as the basis for some of the amounts
recorded in our financial statements. Many of these models involve significant assumptions and have
limitations. See “Risk Factors” and “Risk Management—Model Risk Management” for a discussion of the risk
associated with the use of models.
Fair Value Measurement
The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a
critical accounting estimate because we account for and record a substantial portion of our assets and
liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (also referred
to as an exit price).
In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on how to determine the
fair value when the volume and level of activity for an asset or liability have significantly decreased. If there
has been a significant decrease in the volume and level of activity for an asset or liability as compared to the
normal level of market activity for the asset or liability, there is an increased likelihood that quoted prices or
transactions for the instrument are not reflective of an orderly transaction and may therefore require significant
adjustment to estimate fair value. We evaluate the existence of the following conditions in determining
whether there is an inactive market for an asset or liability: (1) there are few transactions for the product
category; (2) price quotes are not based on current market information; (3) the price quotes we receive vary
significantly either over time or among independent pricing services or dealers; (4) price indices that were
previously highly correlated are demonstrably uncorrelated; (5) there is a significant increase in implied
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