Freddie Mac 2004 Annual Report Download - page 171

Repurchase and Resale Agreements
Freddie Mac enters into repurchase and resale agreements primarily as an investor or to Ñnance its
security positions. Freddie Mac also enters into (a) ""dollar roll'' transactions, which consist of simultaneous
agreements with the same counterparty to sell a security and purchase similar securities at a future date at an
agreed-upon price and (b) ""reverse dollar roll'' transactions, which consist of simultaneous agreements with
the same counterparty to purchase a security and sell similar securities at a future date at an agreed-upon
price. These transactions are accounted for pursuant to SFAS 125/140. In this regard, such transactions are
accounted for as purchases and sales when the transferor relinquishes control over transferred securities. These
transactions are accounted for as secured Ñnancings when the transferor does not relinquish control over
transferred securities. Freddie Mac's policy is to take possession of securities purchased under agreements to
resell and reverse dollar roll transactions. The amount of mortgage-related and non-mortgage-related
securities pledged and that may be repledged under repurchase agreements and dollar roll transactions is
presented parenthetically in the relevant securities captions in the consolidated balance sheets.
Debt Securities Issued
Debt securities issued by Freddie Mac are classiÑed as either Due within one year or Due after one year
based on their remaining contractual maturity. The classiÑcation of interest expense on debt securities as
either short-term or long-term is based on the original contractual maturity of the debt security. Deferred
items, including premiums, discounts, issuance costs and hedging-related basis adjustments, are amortized
and reported through interest expense using the eÅective interest method over the period during which the
related indebtedness is outstanding or, for callable debt, over the period during which the related indebtedness
is expected to be outstanding. For callable debt, changes in the expected call date are reÖected prospectively as
an adjustment to the eÅective yield on the debt. Amortization of hedging-related basis adjustments is initiated
upon the termination of the related hedge relationship, whereas amortization of premiums, discounts and
issuance costs begins at the time of debt issuance. Deferred items, including premiums, discounts and
hedging-related basis adjustments are reported as a component of Debt securities, net whereas issuance costs
are reported as a component of Other assets. Debt securities denominated in a foreign currency are translated
into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any gains/losses are reported
in Non-interest income (loss) Ì Other income.
Contemporaneous exchanges of cash between the company and a creditor in connection with the issuance
of a new debt obligation and satisfaction of an existing debt obligation are accounted for as extinguishments
with recognition of gains or losses in earnings if the debt instruments have substantially diÅerent terms. If the
debt instruments do not have substantially diÅerent terms, the transaction is accounted for as an exchange
rather than an extinguishment. In this case, the fees associated with the new debt obligation, along with the
existing unamortized premium, discount or other basis adjustments on the existing debt obligation, are
considered a basis adjustment on the new debt obligation and are amortized as an adjustment of interest
expense over the remaining term of the new debt obligation.
Derivatives
Generally, derivatives are Ñnancial instruments with little or no initial net investment in comparison to
their notional amount and whose value is based upon an underlying asset, index, reference rate or other
variable. They may be privately negotiated contractual agreements that can be customized to meet speciÑc
needs, including certain commitments to purchase and sell mortgage loans, mortgage-related securities and
debt securities, or they may be standardized contracts executed through organized exchanges. All derivatives
are reported at their fair value on the consolidated balance sheets. The fair value of derivatives is generally
reported net by counterparty, provided that a legally enforceable master netting agreement exists. Derivatives
in a net asset position are reported as Derivative assets, at fair value. Similarly, derivatives in a net liability
position are reported as Derivative liabilities, at fair value.
Currently, the majority of the company's derivatives are not designated in hedge accounting relationships.
For those derivatives not designated as an accounting hedge, fair value gains and losses are reported as
Derivative gains (losses) in the consolidated statements of income. For purchase and sale commitments of
securities classiÑed as trading under SFAS 115, fair value gains and losses are reported as Gains (losses) on
investment activity in the consolidated statements of income.
Freddie Mac
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