Freddie Mac 2006 Annual Report Download - page 114

Table 1.3 Ì Pro Forma Information Ì Change in Accounting for Interest Expense Related to Callable Debt
Year Ended
December 31, 2004
(in millions, except
share-related amounts)
As reported:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,937
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.96
Diluted earnings per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.94
Pro forma:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,910
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.92
Diluted earnings per common shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.90
Beginning October 1, 2005, we changed our method for determining gains and losses upon the resale of PCs and
Structured Securities related to deferred items recognized in connection with our guarantee of those securities. This change
in accounting principle was facilitated by system changes that now allow us to apply and track these deferred items relative
to the speciÑc portions of the purchased PCs and Structured Securities. The lack of certain historical data precluded us
from calculating the cumulative eÅect of the change. We were not able to determine the pro forma eÅects of applying the
new method retroactively. See ""NOTE 2: TRANSFERS OF SECURITIZED INTERESTS IN MORTGAGE-
RELATED ASSETS'' for additional information.
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 in which we hold more than
50 percent of the voting rights or have the ability to exercise control over the entity.
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 when we hold more than 50 percent of the voting rights or have the ability to exercise control
over the entity. Accordingly, we consolidate our two majority-owned 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 on our 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 our consolidated balance sheets and recognize our
share of the entity's net income or losses in the consolidated statements of income as Non-interest income/expense, with an
oÅset to the recorded investment on our 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 reported as part of Other assets on our
consolidated balance sheets. Our share of partnership income or loss is reported in our 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. In addition, cash collateral we obtained from counterparties to
102 Freddie Mac