Freddie Mac 2004 Annual Report Download - page 230

reliable third-party pricing services for the valuation of a greater portion of its debt instruments. Previously the
calculation of the fair value of these instruments was based primarily on an internal model using available
market inputs.
Guarantee obligation for Participation CertiÑcates
Freddie Mac does not establish guarantee obligations for all PCs and Structured Securities held by third
parties for GAAP purposes. In addition, guarantee obligations are not carried at fair value for GAAP
purposes. For fair value balance sheet purposes, guarantee obligations reÖect the fair value of Freddie Mac's
guarantee obligation on all PCs held by third parties. Additionally, for fair value balance sheet purposes,
guarantee obligations are valued using the same method as used for GAAP to determine the guarantee
obligation's initial fair value. For information concerning the company's valuation methodologies and
accounting policies related to guarantee-related credit losses, see ""NOTE 1: SUMMARY OF SIGNIFI-
CANT ACCOUNTING POLICIES,'' and ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS
IN MORTGAGE-RELATED ASSETS.''
Reserve for guarantee losses on Participation CertiÑcates
The carrying amount of the Reserve for guarantee losses on Participation CertiÑcates on the GAAP
consolidated balance sheets represents GAAP loan loss reserves for oÅ-balance sheet PCs that are not already
accounted for under SFAS 125/140. This line item has no basis in the consolidated fair value balance sheets,
because the estimated fair value of all expected default losses is included in the guarantee obligation reported
on the consolidated fair value balance sheets, as discussed above.
Derivative liabilities
See discussion under ""Derivative assets'' above.
Other liabilities
Other liabilities principally consists of amounts due to PC investors (i.e., principal and interest), funding
liabilities associated with investments in LIHTC partnerships, accrued interest payable on debt securities and
other miscellaneous obligations of less than one year. Management believes the carrying amount of these
liabilities is a reasonable approximation of their fair value, except for funding liabilities associated with
investments in LIHTC partnerships, for which fair value is estimated using expected cash Öows discounted at
a market-based yield. Also, management adjusts the GAAP-basis deferred taxes for consolidated fair value
balance sheets purposes. Fair values include estimated income taxes on the diÅerence between the
consolidated fair value balance sheets pre-tax net assets and the consolidated GAAP balance sheets pre-tax
net assets.
Minority interests in consolidated subsidiaries
Minority interests in consolidated subsidiaries primarily represent preferred stock interests that third
parties hold in Freddie Mac's two majority-owned REIT subsidiaries. In accordance with GAAP, Freddie
Mac consolidated the REITs. The fair value of the third-party minority interests in these REITs was based on
the estimated value of the underlying REIT preferred stock determined by management based on a valuation
model adjusted to consider the impact of embedded call options, using market-based information to the extent
available.
Net assets attributable to preferred stockholders
To determine the preferred stock fair value, Freddie Mac uses a market-based approach incorporating
quoted dealer prices.
Net assets attributable to common stockholders
Net assets attributable to common stockholders is equal to the fair value of net assets (the diÅerence
between the fair value of Freddie Mac's assets and the fair value of liabilities and minority interest), less the
fair value of net assets attributable to preferred stockholders.
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