Freddie Mac 2004 Annual Report Download - page 74

amortization expense related to previously capitalized software development costs, net of reductions for
current period capitalized software development costs.
Table 30 summarizes Administrative expenses for 2004, 2003 and 2002.
Table 30 Ì Administrative Expenses
Year Ended December 31,
2004 2003 2002
(dollars in millions)
Administrative expenses:
Salaries and employee beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 758 $ 624 $593
Professional services(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 588 311 155
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60 52 42
Other administrative expenses(1)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 144 194 184
Total administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,550 $1,181 $974
(1) We reclassiÑed certain expenses from Other administrative expenses to Professional services for 2003 and 2002 to conform with the
2004 presentation.
(2) Other charitable contributions are included in Other administrative expenses for 2004, 2003 and 2002. See ""Table 31 Ì Other
Expenses'' for the special charitable contributions made in 2002.
Administrative expenses totaled $1,550 million, $1,181 million and $974 million in 2004, 2003 and 2002,
respectively. Salaries and employee beneÑts rose in each year primarily because we increased the number of
employees. In addition, employee incentive compensation costs increased by approximately $50 million in
2004 over 2003 levels as a result of the increased number of employees and eÅorts to retain key employees
during the restatement period and to attract new employees. We also incurred approximately $18 million of
employee severance and related costs and approximately $5 million of other expenses related to ceasing the
PC market making and support activities of our Securities Sales & Trading Group business unit during the
fourth quarter of 2004. The increase in Professional services expense in 2004 was primarily driven by our
ongoing Ñnancial reporting and internal control remediation activities.
The increase in Salaries and employee beneÑts, Professional services and Other administrative expenses
in 2003 compared to 2002 was primarily driven by costs associated with the restatement. During 2003, we
incurred expenses associated with the restatement totaling $172 million, which consisted of approximately
$149 million of professional services expenses due to increased accounting, auditing, consulting and legal
services; $15 million of compensation costs; and $8 million of other costs.
Other administrative expenses are presented net of certain expenses deferred relating to capitalized
software development activities. The reduction to Other administrative expenses with respect to capitalized
software development was $157 million, $79 million and $57 million in 2004, 2003 and 2002, respectively.
These amounts were oÅset by related amortization expenses and impairments of $63 million, $37 million and
$22 million in 2004, 2003 and 2002, respectively, also recorded in Other administrative expenses. Capitalized
software development costs are amortized over periods of three years or less.
(Provision) BeneÑt for Credit Losses and Real Estate Owned, or REO, Operations Income (Expense)
We collectively refer to our Reserve for losses on mortgage loans held-for-investment and Reserve for
guarantee losses on Participation CertiÑcates as our Loan Loss Reserves. The Provision for credit losses
includes our provision for losses incurred on our mortgage loans held-for-investment, which are a component
of our Retained Portfolio; our provision for incurred losses related to (1) Outstanding PCs and (2) that
portion of Structured Securities held by third parties that are backed by non-Freddie Mac mortgage-related
securities, which are oÅ-balance sheet obligations; and our provision for uncollectible interest on single-family
loans underlying PCs held by third parties. REO operations income (expense) includes certain costs associated
with the acquisition of real estate at the time of foreclosure, gains and losses on the sale of foreclosed
properties we hold, as well as the cost to hold these properties, including real estate taxes, insurance, repairs
and fees incurred to prepare the properties for sale, and a provision for valuation losses occurring between
acquisition and disposition.
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