Freddie Mac 2006 Annual Report Download - page 123

Earnings Per Common Share
Because we have participating securities, we use the ""two-class'' method of computing earnings per common share. The
""two-class'' method is an earnings allocation formula that determines earnings per share for common stock and participating
securities based on dividends declared and participation rights in undistributed earnings. Our participating securities consist
of vested options to purchase common stock that earn dividend equivalents at the same rate when and as declared on
common stock.
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, changes in the minimum pension liability, and changes in components of pension liability that receive
deferred expense recognition.
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 on our consolidated Ñnancial statements.
Recently Adopted Accounting Standards
Accounting for Stock-Based Compensation Ì EÅective January 1, 2006, we adopted SFAS 123(R), ""Share-Based
Payment,'' or SFAS 123(R), which requires compensation expense for stock options and other share-based payments to be
measured based on the instruments' grant-date fair value, and for the expense to be recorded based on the fair value reduced
by expected forfeitures. We adopted this standard by using the modiÑed prospective method of transition which requires
the provisions of SFAS 123(R) to be applied to new awards as well as awards modiÑed, repurchased or cancelled after the
eÅective date. In adopting SFAS 123(R), we recognized compensation expense for stock-based compensation awards net
of estimated forfeitures. Previously, the eÅects of forfeitures were recorded as they occurred. The eÅect of adopting
SFAS 123(R) did not have a material impact on our consolidated Ñnancial statements.
Accounting Changes and Error Corrections Ì On January 1, 2006, we adopted SFAS No. 154, ""Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3,'' or SFAS 154. SFAS 154
changes the requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary
changes in accounting principle and changes required by an accounting pronouncement in the instance that the
pronouncement does not include speciÑc transition provisions. APB Opinion No. 20, ""Accounting Changes,'' or APB 20,
requires that the cumulative eÅect of most voluntary changes in accounting principles be included in net income in the
period of adoption. The new statement requires retrospective application to prior periods' Ñnancial statements of a voluntary
change in accounting principle, unless it is impracticable to determine either period-speciÑc eÅects or the cumulative eÅect
of the change. SFAS 154 is eÅective for accounting changes and corrections of errors made in Ñscal years beginning after
December 15, 2005. Our adoption of SFAS 154 did not have a material impact on our consolidated Ñnancial statements.
Accounting for Employers' DeÑned BeneÑt Pension and Other Postretirement Plans Ì On December 31, 2006, we
adopted SFAS 158. In accordance with this standard, on December 31, 2006, we recorded the funded status of each of our
deÑned beneÑt pension and postretirement plans as an asset or liability on our consolidated balance sheet with a
corresponding oÅset, net of taxes, recorded in AOCI within Stockholders' Equity. See ""Table 1.2 Ì Change in Accounting
for DeÑned BeneÑt Plans Ì Impact on Financial Statements.''
EÅective December 31, 2008, SFAS 158 also requires our deÑned beneÑt plan assets and obligations to be measured as
of the date of our consolidated balance sheet. We expect that the eÅect of implementing the change in measurement date
from September 30 to December 31 will not be material to our Ñnancial condition or our results of operations.
Determining Variability in Applying FASB Interpretation No. 46(R) Ì EÅective July 1, 2006, we adopted FASB StaÅ
Position No. FIN 46(R)-6, ""Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R),''
or FSP FIN 46(R)-6. The adoption of FSP FIN 46(R)-6 was not material to our Ñnancial condition or results of
operations.
111 Freddie Mac