Fannie Mae 2010 Annual Report Download - page 277

“Other comprehensive loss,” net of applicable taxes. In determining whether a credit loss exists, we use our
best estimate of cash flows expected to be collected from the debt security.
We consider guarantees, insurance contracts or other credit enhancements (such as collateral) in determining
our best estimate of cash flows expected to be collected only if (1) such guarantees, insurance contracts or
other credit enhancements provide for payments to be made solely to reimburse us for failure of the issuer to
satisfy its required payment obligations, (2) such guarantees, insurance contracts or other credit enhancements
are contractually attached to the security and (3) collection of the amounts receivable under these agreements
is deemed probable. Guarantees, insurance contracts or other credit enhancements are considered contractually
attached if they are part of and trade with the security upon transfer of the security to a third party.
In periods after we recognize an other-than-temporary impairment of debt securities, we use the prospective
interest method to recognize interest income. Under the prospective interest method, we use the new cost basis
and the cash flows expected to be collected from the security to calculate the effective yield.
As a result of adopting the FASB modified standard on the model for assessing other-than-temporary
impairments, we recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis
($5.6 billion after tax) to reclassify the noncredit portion of previously recognized other-than-temporary
impairments from “Accumulated deficit” to AOCI. We also reduced the “Accumulated deficit” and valuation
allowance by $3.0 billion for the deferred tax asset related to the amounts previously recognized as
other-than-temporary impairments in our consolidated statements of operations based upon the assertion of our
intent and ability to hold certain of these securities until recovery.
Prior to April 1, 2009, we considered a debt security to be other-than-temporarily impaired if its estimated fair
value was less than its amortized cost basis and we determined that it was probable that we would be unable
to collect all of the contractual principal and interest payments or we did not intend to hold the security until
it recovered to its previous carrying amount. In making an other-than-temporary impairment assessment, we
considered many factors, including the severity and duration of the impairment, recent events specific to the
issuer and/or the industry to which the issuer belongs, external credit ratings and recent downgrades, as well as
our ability and intent to hold such securities until recovery.
We considered guarantees, insurance contracts or other credit enhancements (such as collateral) in determining
whether it was probable that we would be unable to collect all amounts due according to the contractual terms
of a debt security to the same extent that we currently consider them in estimating expected cash flows. When
we determined that it was probable that we would not collect all of the contractual principal and interest
amounts due or we determined that we did not have the ability or intent to hold the security until recovery of
an unrealized loss, we identified the security as other-than-temporarily impaired. For all other securities in an
unrealized loss position, we had the positive intent and ability to hold such securities until the earlier of full
recovery or maturity.
When we determined an investment was other-than-temporarily impaired, we wrote down the cost basis of the
investment to its fair value and included the loss in “Other-than-temporary-impairments” in our consolidated
statements of operations. The fair value of the investment then became its new cost basis. We did not increase
the investment’s cost basis for subsequent recoveries in fair value, which were recorded in AOCI.
F-19
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)