Freddie Mac 2004 Annual Report Download - page 162

Transfers of Financial Assets that Qualify as Purchases or Sales
Freddie Mac accounts for transfers of Ñnancial assets pursuant to the requirements of SFAS No. 140,
""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities''
(""SFAS 140''), and, prior to April 1, 2001, SFAS No. 125, ""Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities'' (""SFAS 125''), collectively referred to as
""SFAS 125/140.'' If Freddie Mac determines that it surrenders control over assets that it transfers to a third
party, Freddie Mac accounts for such transfers as sales to the extent its counterparty provides consideration
other than beneÑcial interests in the transferred assets (e.g., cash). Likewise, if Freddie Mac determines that
it obtains control over assets that were transferred to it, it accounts for such transfers as purchases to the extent
Freddie Mac provides consideration other than beneÑcial interests in exchange for the transferred assets.
Freddie Mac accounts for cash-based transfers of Ñnancial assets that do not qualify as sales as secured
borrowings.
If a transfer of Ñnancial assets qualiÑes as a sale, Freddie Mac continues to carry on its consolidated
balance sheets any retained interests in securitized Ñnancial assets. Such retained interests generally take one
of two forms. First, in connection with its right to receive guarantee payments (as further discussed below),
Freddie Mac recognizes a retained interest that is classiÑed on its consolidated balance sheets as Guarantee
asset for Participation CertiÑcates, at fair value. (This retained interest is referred to below as a ""GA''.)
Second, Freddie Mac recognizes PCs (or Structured Securities issued by the company using PCs held in its
portfolio) that are not transferred to third parties upon the completion of a securitization of mortgage loans
(or, in the case of Structured Securities, upon the resecuritization of PCs or Structured Securities held in
portfolio). PCs and Structured Securities that are held in portfolio are accounted for pursuant to the
requirements of SFAS No. 115, ""Accounting for Certain Investments in Debt and Equity Securities''
(""SFAS 115''). The carrying amounts of all of such retained interests are determined by allocating the
previous carrying amount of the transferred assets between assets sold and the retained interests based upon
their relative fair values at the date of transfer.
Upon completion of a transfer of Ñnancial assets that qualiÑes as a sale, Freddie Mac also de-recognizes
all assets sold and recognizes all assets obtained and liabilities incurred. In this regard, Freddie Mac recognizes
the fair value of its recourse obligation to guarantee the payment of principal and interest of PCs and
Structured Securities transferred in sale transactions. The initial fair value of such recourse obligations is
intended to reÖect the estimated amount that Freddie Mac would be required to pay to a third party of similar
credit standing to be relieved of Freddie Mac's obligations under the guarantee contract. The portion of such
recourse obligations that relates to Freddie Mac's non-contingent obligation to stand ready to perform under
its guarantee is recognized as Guarantee obligation for Participation CertiÑcates (or as a ""GO''), while the
portion of such recourse obligations that relates to incurred losses on securitized assets is recognized for
consolidated balance sheet purposes as Reserve for guarantee losses on Participation CertiÑcates. Such
recourse obligations serve as a reduction of proceeds in the calculation of the corresponding gain (loss) on the
sale of transferred PCs and Structured Securities. The fair value of a recognized recourse obligation is
estimated using an expected cash Öow approach consistent with Statement of Financial Accounting Concepts
No. 7, ""Using Cash Flow Information and Present Value in Accounting Measurements'' (""CON 7''). These
recourse obligations are valued independently of corresponding GAs. The resulting gain (loss) on sale of
transferred PCs and Structured Securities is reÖected in Freddie Mac's consolidated statements of income as a
component of Gains (losses) on investment activity.
Subsequent Measurement of Recognized GAs Ì Freddie Mac generally views recognized GAs as
Ñnancial assets that can be prepaid or otherwise settled in a manner that may prevent Freddie Mac from
recovering substantially all of its recorded investment. As a result, Freddie Mac generally accounts for GAs
like debt instruments classiÑed as trading under SFAS 115. All changes in the fair value of recognized GAs
are reÖected in earnings as a component of Gains (losses) on ""Guarantee asset for Participation CertiÑcates,
at fair value.'' All guarantee-related compensation that is received over the life of the loan in cash is reÖected
in earnings as a component of Management and guarantee income. See ""NOTE 2: TRANSFERS OF
SECURITIZED INTERESTS IN MORTGAGE-RELATED ASSETS'' for a discussion of the attribution
of GA-related cash Öows.
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