Freddie Mac 2005 Annual Report Download - page 60

The balance of AOCI at December 31, 2005 was a loss of approximately $8.8 billion, net of tax, compared to a loss of
$3.6 billion, net of tax, at December 31, 2004. This decline in the AOCI balance was primarily the result of changes in the
mark-to-fair value of our available-for-sale securities. Our available-for-sale securities are primarily funded with debt
securities which are recorded at amortized cost. As interest rates rose during 2005, the balance of AOCI related to available-
for-sale securities shifted to a net unrealized loss position from a net unrealized gain position at December 31, 2004. The
balance of AOCI associated with our available-for-sale securities was a loss of approximately $2.5 billion, net of tax, at
December 31, 2005 compared to a gain of $4.3 billion, net of tax, at December 31, 2004. The decline in the AOCI balance
associated with our available-for-sale securities was partially oÅset by the recognition of deferred losses in AOCI related to
derivatives in cash Öow hedge accounting relationships. The balance of net deferred losses in AOCI related to derivatives in
cash Öow hedge relationships was a loss of $6.3 billion, net of tax, at December 31, 2005 compared to a loss of $7.9 billion,
net of tax, at December 31, 2004.
At December 31, 2005, $668 million notional amount of derivative contracts was designated in cash Öow hedge
relationships, consisting of $534 million notional amount of foreign-currency swaps and $134 million notional amount of
commitments. For derivatives that receive cash Öow hedge accounting treatment, the eÅective portion of the change in fair
value of the derivative asset or derivative liability is presented in the stockholders' equity section of our consolidated balance
sheets in AOCI, net of taxes. The eÅective portion of the derivative generally oÅsets, on a cumulative basis, the cumulative
change in the present value of the hedged cash Öows.
At December 31, 2005, the net cumulative change in the fair value of all derivatives designated in cash Öow hedge
relationships for which the forecasted transactions had not yet aÅected earnings since SFAS 133 was implemented on
January 1, 2001 (net of amounts previously reclassiÑed to earnings through December 31, 2005) or that were still open was a
loss of approximately $6.3 billion on an after-tax basis. This amount related almost entirely to net deferred losses on closed
cash Öow hedge relationships, which involve derivatives that have been terminated or are no longer designated in cash Öow
hedge relationships. The majority of the closed cash Öow hedges related to the hedging of the variability of cash Öows from
forecasted issuances of debt. Fluctuations in prevailing market interest rates have no impact on the deferred portion of
AOCI, net of taxes, relating to losses on closed cash Öow hedges. Therefore, the deferred losses related to closed cash Öow
hedges will be recognized as a reduction of earnings as the originally hedged forecasted transactions aÅect earnings, unless
it becomes probable that the forecasted transaction will not occur. If it is probable that the forecasted transaction will not
occur, then the entire deferred amount associated with the forecasted transaction will be reclassiÑed into earnings
immediately.
Of the $6.3 billion net unrealized loss included in AOCI, net of taxes, with respect to cash Öow hedge relationships at
December 31, 2005, approximately $5.9 billion relates to hedges associated with the forecasted issuances of non-callable
debt securities with maturities or interest payment frequencies of approximately one month to one year. Such debt issuances
are forecasted over the next 28 years; however, over 90 percent of the deferred losses relates to such issuances over the next
10 years. Over the next 10 years, the forecasted debt issuances associated with these hedges range from approximately
$24 billion to $105 billion in any one quarter, with an average of $74 billion per quarter.
Table 28 presents the scheduled amortization of the net deferred losses in AOCI at December 31, 2005, related to
closed cash Öow hedges based on a number of hypothetical assumptions that may diÅer from our expectations of future
events or from actual future events. It is likely that actual amortization in any given future period will diÅer from the
scheduled amortization presented in Table 28, perhaps materially, as we make decisions or changes in market conditions
occur that diÅer from these assumptions. For example, the scheduled amortization for cash Öow hedges related to future debt
issuances is based on the assumption that we will not repurchase the related debt and that no other factors aÅecting debt
issuance probabilities will change. In addition, for forward purchase commitments in closed cash Öow hedge relationships,
the scheduled amortization assumes no changes in prepayment activities or other factors aÅecting the timing of
reclassiÑcations.
44 Freddie Mac