Freddie Mac 2005 Annual Report Download - page 94

Other
We extend other guarantees and provide indemniÑcation to counterparties for breaches of standard representations and
warranties in contracts entered into in the normal course of business based on an assessment that the risk of loss would be
remote. See ""NOTE 4: FINANCIAL GUARANTEES'' to the consolidated Ñnancial statements for additional
information.
We are a party to numerous entities that are considered to be variable interest entities in accordance with FASB
Interpretation No. 46 (Revised December 2003), ""Consolidation of Variable Interest Entities'', or FIN 46(R). These
variable interest entities include low-income multifamily housing tax credit partnerships, certain Structured Securities trusts
(T-Series transactions or alternative collateral deals), and certain asset-backed investment entities. See ""NOTE 3:
VARIABLE INTEREST ENTITIES'' to the consolidated Ñnancial statements for additional information related to our
signiÑcant variable interests in these VIEs.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments for mortgage
loans and mortgage-related securities. A portion of these commitments are accounted for as derivatives, with their fair value
reported as either Derivative assets, at fair value or Derivative liabilities, at fair value on the consolidated balance sheets.
See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks'' for further information. Certain non-
derivative commitments are related to commitments arising from mortgage swap transactions and commitments to purchase
certain multifamily mortgage loans that will be classiÑed as held-for-investment. These non-derivative commitments totaled
$178.8 billion and $182.9 billion at December 31, 2005 and 2004, respectively. Such commitments were not accounted for
as derivatives and were not recorded on our consolidated balance sheets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our Ñnancial
condition and results of operations since they are particularly sensitive to our judgment and are highly complex in nature.
Some of these policies and estimates relate to matters that are inherently uncertain. Actual results could diÅer from our
estimates and it is possible that such diÅerences could have a material impact on our consolidated Ñnancial statements.
The accounting policies discussed in this section are particularly critical to understanding our consolidated Ñnancial
statements. For additional information about these and other accounting policies, including recently issued accounting
pronouncements, see ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated
Ñnancial statements. We have discussed each of these critical accounting policies and the signiÑcant related estimates with
the Audit Committee of the board of directors.
Fair Value Measurement
The measurement of fair value is fundamental to the presentation of our Ñnancial condition and results of operations in
our consolidated Ñnancial statements. Fair value is deÑned as the amount at which an asset or liability could be exchanged
between willing parties, other than in a forced or liquidation sale. We record many of our Ñnancial instruments at fair value
in our consolidated balance sheets, with changes in these fair values recognized as gains and losses in our consolidated
statements of income or deferred, net of tax, in AOCI. We also disclose fair value-based consolidated balance sheets, which
present our Ñnancial assets and liabilities at fair value (including instruments such as debt, which are presented at amortized
cost in our consolidated Ñnancial statements). Our consolidated fair value balance sheets satisfy our disclosure
requirements under SFAS No. 107, ""Disclosures about Fair Value of Financial Instruments,'' or SFAS 107, and are a tool to
communicate our Ñnancial position and results on a fair value basis. See ""CONSOLIDATED FAIR VALUE BALANCE
SHEETS ANALYSIS'' and ""NOTE 16: FAIR VALUE DISCLOSURES'' to our consolidated Ñnancial statements for
more information.
Fair value aÅects our earnings in a variety of ways. For certain Ñnancial instruments that are carried at fair value (such
as securities and PC residuals classiÑed as trading, derivatives in fair value hedge accounting relationships, derivatives with
no hedge designation and the Guarantee asset), changes in fair value are recognized in current period earnings. These
changes are classiÑed in several captions on our consolidated statements of income, including Gains (losses) on investment
activity, Derivative gains (losses) and Gains (losses) on Guarantee asset. For certain other Ñnancial instruments that are
carried at fair value (such as securities and PC residuals classiÑed as available-for-sale and derivatives in cash Öow hedge
relationships), changes in fair value are generally deferred, net of tax, in AOCI, a component of Stockholders' equity. The
deferred gains and losses in AOCI, initially measured at fair value, are recognized in earnings over time, including through
amortization, sale of securities from the available-for-sale category or impairment recognition. In addition, impairments of
mortgage loans classiÑed as held-for-sale are recognized in earnings through lower-of-cost-or-market valuation adjustments.
Finally, certain other amounts (such as the Guarantee obligation) are initially measured at fair value, but are not
remeasured at fair value on a periodic basis. These amounts aÅect earnings over time through the amortization of these
78 Freddie Mac