Fannie Mae 2012 Annual Report Download - page 299

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-65
consolidated statements of operations and comprehensive income (loss), we eliminate guaranty fees related to
consolidated trusts.
• Gains (losses) from partnership investments—Gains (losses) from partnership investments primarily reflect gains or
losses on investments in affordable rental and for-sale housing partnerships measured under the equity method of
accounting. To reconcile to our consolidated statements of operations and comprehensive income (loss), we adjust the
gains or losses to reflect the consolidation of certain partnership investments.
Capital Markets Group
Our Capital Markets group generates most of its revenue from the difference, or spread, between the interest we earn on our
mortgage assets and the interest we pay on the debt we issue to fund these assets. We refer to this spread as our net interest
yield. Changes in the fair value of the derivative instruments and trading securities we hold impact the net income or loss
reported by the Capital Markets group. The net income or loss reported by our Capital Markets group is also affected by the
impairment of AFS securities.
Our segment reporting presentation differs from our consolidated balance sheets and statements of operations and
comprehensive income (loss) in order to reflect the activities and results of the Capital Markets group. The significant
differences from the consolidated statements of operations and comprehensive income (loss) are as follows:
• Net interest income—Net interest income reflects the interest income on mortgage loans and securities owned by
Fannie Mae and interest expense on funding debt issued by Fannie Mae, including accretion and amortization of any
cost basis adjustments. To reconcile to our consolidated statements of operations and comprehensive income (loss), we
adjust for the impact of consolidated trusts and intercompany eliminations as follows:
• Interest income: Interest income consists of interest on the segment’s interest-earning assets, which differs from
interest-earning assets in our consolidated balance sheets. We exclude loans and securities that underlie the
consolidated trusts from our Capital Markets group balance sheets. The net interest income reported by the Capital
Markets group excludes the interest income earned on assets held by consolidated trusts. As a result, we report
interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio.
For mortgage loans held in our portfolio, when interest income is no longer recognized in accordance with our
nonaccrual accounting policy, the Capital Markets group recognizes interest income for reimbursement from Single-
Family and Multifamily for the contractual interest due under the terms of our intracompany guaranty arrangement.
• Interest expense: Interest expense consists of contractual interest on the Capital Markets group’s interest-bearing
liabilities, including the accretion and amortization of any cost basis adjustments. It excludes interest expense on
debt issued by consolidated trusts. Therefore, the interest expense recognized on the Capital Markets group income
statement is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our consolidated balance
sheets. Net interest expense also includes an allocated cost of capital charge among the three business segments that
is not included in net interest income in our consolidated statements of operations and comprehensive income (loss).
• Investment gains or losses, net—Investment gains or losses, net reflects the gains and losses on securitizations and
sales of available-for-sale securities from our portfolio. To reconcile to our consolidated statements of operations and
comprehensive income (loss), we eliminate gains and losses on securities that have been consolidated to loans.
• Fair value gains or losses, net—Fair value gains or losses, net for the Capital Markets group includes derivative gains
and losses, foreign exchange gains and losses, and the fair value gains and losses on certain debt securities in our
portfolio. To reconcile to our consolidated statements of operations and comprehensive income (loss), we eliminate fair
value gains or losses on Fannie Mae MBS that have been consolidated to loans.
• Other expenses, net—Debt extinguishment gains or losses recorded on the segment statements of operations relate
exclusively to our funding debt, which is reported as “Debt of Fannie Mae” in our consolidated balance sheets. To
reconcile to our consolidated statements of operations and comprehensive income (loss), we include debt
extinguishment gains or losses related to consolidated trusts to arrive at our total recognized debt extinguishment gains
or losses.
Segment Allocations and Results
Our business segment financial results include directly attributable revenues and expenses. Additionally, we allocate to each
of our segments: (1) capital using FHFA minimum capital requirements adjusted for over- or under-capitalization; (2) indirect
administrative costs; and (3) a provision or benefit for federal income taxes. In addition, we allocate intracompany guaranty