Freddie Mac 2005 Annual Report Download - page 124

Stock-Based Compensation
We record compensation expense equal to the estimated fair value of the stock-based compensation on the grant date,
which is generally the eÅective date of the grant, amortized on a straight-line basis over the vesting period. The vesting
period is generally three to Ñve years for options, restricted stock and restricted stock units and three months for the
Employee Stock Purchase Plan, or ESPP. The recorded compensation expense is oÅset by an adjustment to Additional paid-
in capital in our consolidated balance sheets.
The fair value of options to purchase shares of our common stock, including options issued pursuant to the ESPP, is
estimated using a Black-Scholes option pricing model, taking into account the exercise price and an estimate of the
expected life of the option, the market value of the underlying stock, expected volatility, expected dividend yield, and the
risk-free interest rate for the expected life of the option. The fair value of restricted stock and restricted stock unit awards is
based on the fair value of our common stock on the grant date.
Incremental compensation expense related to modiÑcation of awards is based on a comparison of the fair value of the
modiÑed award with the fair value of the original award before modiÑcation (measured using the shorter of the remaining or
revised term). We generally expect to settle our stock-based compensation awards in shares. In limited cases an award may
be cash-settled upon a contingent event such as involuntary termination. These awards are accounted for as an equity award
until the contingency becomes probable of occurring, then the award is reclassiÑed from equity to liability. Such liabilities
are initially measured at intrinsic value with changes in intrinsic value recognized as an adjustment to Salaries and
employee beneÑts.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), ""Share-Based Payment,'' or SFAS 123(R).
SFAS 123(R) requires companies to measure and record compensation expense for share-based payments based on the
instruments' fair value reduced by expected forfeitures. The adoption of the revision to this statement did not have a material
impact on our Ñnancial position or results of operations.
Earnings Per Common Share
Basic earnings per common share is computed as net income available to common stockholders divided by the weighted
average common shares outstanding for the period. Diluted earnings per common share is determined using the weighted
average number of common shares during the period, adjusted for the dilutive eÅect of common stock equivalents. Dilutive
common stock equivalents reÖect the assumed net issuance of additional common shares pursuant to certain of our stock-
based compensation plans that could potentially dilute earnings per common share.
Comprehensive Income
Comprehensive income is the change in equity, on a net of tax basis, resulting from transactions and other events and
circumstances from non-owner sources during a period. It includes all changes in equity during a period, except those
resulting from investments by stockholders. We deÑne comprehensive income as consisting of net income plus changes in
the unrealized gains and losses on available-for-sale securities, the eÅective portion of derivatives accounted for as cash Öow
hedge relationships, and changes in the minimum pension liability.
Reportable Segments
We have one business segment for Ñnancial reporting purposes under SFAS No. 131, ""Disclosures About Segments of
an Enterprise and Related Information,'' or SFAS 131, for all periods presented in the consolidated Ñnancial statements.
Recently Issued Accounting Standards, Not Yet Adopted
Accounting for Certain Hybrid Instruments Ì In February 2006, the FASB issued SFAS No. 155, ""Accounting for
Certain Hybrid Financial Instruments,'' or SFAS 155. This statement amends SFAS No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' or SFAS 133, and SFAS No. 140. The objective of this statement is to simplify the
accounting for certain hybrid Ñnancial instruments, permitting fair value measurement for any hybrid Ñnancial instrument
with an embedded derivative that otherwise would require bifurcation. In addition, this statement establishes a requirement
to evaluate interests in securitized Ñnancial assets to identify instruments that are freestanding derivatives or that are hybrid
Ñnancial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 is eÅective for all Ñnancial
instruments acquired or issued after the beginning of an entity's Ñrst Ñscal year that begins after September 15, 2006. Since
SFAS 155 is to be adopted prospectively, it will not result in a cumulative eÅect of a change in accounting principle. We are
presently assessing which instruments will be aÅected and how other potential accounting standards may interact with
SFAS 155. With respect to mortgage-related security purchases beginning in 2007, this standard could require us to account
for these securities, or a portion of these securities, by recognizing changes in fair values in current earnings.
Determining Variability in Applying FASB Interpretation No. 46(R) Ì In April 2006, the FASB issued FASB StaÅ
Position No. FSP FIN 46(R)-6, ""Determining the Variability to Be Considered in Applying FASB Interpretation
108 Freddie Mac