Fannie Mae 2012 Annual Report Download - page 74

69
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this MD&A in conjunction with our consolidated financial statements as of December 31, 2012 and related
notes, and with “Business—Executive Summary.”
This report 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 “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 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 our Board of Directors. See “Risk Factors” for a
discussion of the risk associated with the need for management to make judgments and estimates in applying our accounting
policies and methods. We have identified four 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
• Total Loss Reserves
• Other-Than-Temporary Impairment of Investment Securities
• Deferred Tax Assets
Fair Value Measurement
The use of fair value to measure our assets and liabilities is fundamental to our financial statements and our fair value
measurement is a critical accounting estimate because we account for and record a portion of our assets and liabilities at fair
value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used
to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in “Note 17, Fair
Value.”
The fair value accounting rules provide a three-level fair value hierarchy for classifying financial instruments. This hierarchy
is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Each
asset or liability is assigned to a level based on the lowest level of any input that is significant to its fair value measurement.
The three levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities.
Level 3: Unobservable inputs.
The majority of the financial instruments that we report at fair value in our consolidated financial statements fall within the
Level 2 category and are valued primarily utilizing inputs and assumptions that are observable in the marketplace, that can be
derived from observable market data or that can be corroborated by recent trading activity of similar instruments with similar
characteristics. For example, we generally request non-binding prices from at least three independent pricing services to
estimate the fair value of our trading and available-for-sale securities at an individual security level. We use the average of
these prices to determine the fair value.
In the absence of such information or if we are not able to corroborate these prices by other available, relevant market
information, we estimate their fair values based on single source quotations from brokers or dealers or by using internal
calculations or discounted cash flow techniques that incorporate inputs, such as prepayment rates, discount rates and