Freddie Mac 2005 Annual Report Download - page 116

Consolidation and Equity Method of Accounting
The consolidated Ñnancial statements include our accounts and those of our subsidiaries. All material intercompany
transactions have been eliminated in consolidation. For each entity with which we are involved, we determine whether the
entity should be considered our subsidiary and included in our consolidated Ñnancial statements. We consolidate (a) all
Variable Interest Entities, or VIEs, in which we are the primary beneÑciary and (b) entities that are not VIEs in which we
hold more than 50 percent of the voting rights and have the ability to exercise control over the entity.
For each entity in which we are involved, we determine if the entity is a VIE. A VIE is an entity (a) that has a total
equity investment at risk that is not suÇcient to Ñnance its activities without additional subordinated Ñnancial support from
other entities or (b) where the group of equity holders does not have the ability to make signiÑcant decisions about the
entity's activities, or the obligation to absorb the entity's expected losses or the right to receive the entity's expected residual
returns, or both. We consolidate entities that are VIEs when we are the primary beneÑciary. We are considered the primary
beneÑciary and must consolidate a VIE when we absorb a majority of expected losses or expected residual returns, or both.
In addition to the VIEs that are consolidated, we have signiÑcant variable interest in certain other VIEs that are not
consolidated because we are not the primary beneÑciary. See ""NOTE 3: VARIABLE INTEREST ENTITIES'' for more
information.
We consolidate entities that are not VIEs when we hold more than 50 percent of the voting rights and have the ability to
exercise control over the entity. Accordingly, we consolidate our two majority-owned Real Estate Investment Trusts, or
REITs, Home Ownership Funding Corporation and Home Ownership Funding Corporation II. The equity and net earnings
attributable to the minority shareholder interests in our consolidated subsidiaries are reported separately in the consolidated
balance sheets as Minority interests in consolidated subsidiaries and in the consolidated statements of income as Minority
interests in earnings of consolidated subsidiaries.
We use the equity method of accounting for VIEs when we are not the primary beneÑciary and for entities that are not
VIEs over which we have the ability to exercise signiÑcant inÖuence, but not control. Under the equity method of
accounting, we report our recorded investment as part of Other assets on the consolidated balance sheets and recognize our
share of the entity's net income or losses in the consolidated statements of income, with an oÅset to the recorded investment
on the consolidated balance sheets. Losses are recognized up to the amount of investment recorded.
We regularly invest as a limited partner in qualiÑed low-income housing tax credit, or LIHTC, partnerships that are
eligible for federal tax credits. Most of these are VIEs. We are the primary beneÑciary and consolidate certain of these
partnerships as described further in ""NOTE 3: VARIABLE INTEREST ENTITIES.'' Our recorded investment in those
partnerships that are not consolidated is accounted for under the equity method and is reported as part of Other assets on
the consolidated balance sheets. Our share of partnership income or loss is reported in the consolidated statements of
income as Non-interest expense Ì Housing tax credit partnerships. Our obligations to make delayed equity contributions
that are unconditional and legally binding are recorded at their present value in Other liabilities on the consolidated balance
sheets. To the extent our cost basis in qualiÑed LIHTC partnerships diÅers from the book basis reÖected at the partnership
level, the diÅerence is amortized over the life of the tax credits and included in our share of earnings (losses) from housing
tax credit partnerships. We periodically review these investments for impairment and adjust them to fair value when a
decline in market value below the recorded investment is deemed to be other than temporary. Impairment losses are
included in our consolidated statements of income as part of Non-interest expense Ì Housing tax credit partnerships.
Cash and Cash Equivalents and Statements of Cash Flows
Highly liquid investment securities that have an original maturity of three months or less and are used for cash
management purposes are accounted for as cash equivalents. Cash collateral we obtained from counterparties to derivative
contracts where we are in a net unrealized gain position is recorded as Cash and cash equivalents. The vast majority of the
cash and cash equivalents balance is interest-bearing in nature.
In the consolidated statements of cash Öows, cash Öows related to the acquisition and termination of derivatives other
than forward commitments are generally classiÑed in investing activities, without regard to whether the derivatives are
designated as a hedge of another item. Cash Öows from commitments accounted for as derivatives that result in the
acquisition or sale of mortgage securities or mortgage loans are classiÑed in either: (a) operating activities for trading
securities or mortgage loans classiÑed as held-for-sale, or (b) investing activities for available-for-sale securities or mortgage
loans classiÑed as held-for-investment. Cash Öows related to mortgage loans classiÑed as held-for-sale are classiÑed in
operating activities until the loans have been securitized and retained as available-for-sale PCs, at which time the cash Öows
are classiÑed as investing activities. Cash Öows related to guarantee fees, including buy-up and buy-down payments, are
classiÑed as operating activities, along with the cash Öows related to the collection and distribution of payments on the
mortgage loans underlying PCs. Buy-up and buy-down payments are discussed further below in ""Swap-Based Issuances of
PCs and Structured Securities.'' There were less than $1 million, $428 million and $322 million of non-cash net transfers to
100 Freddie Mac