Freddie Mac 2008 Annual Report Download - page 142

However, different judgments could have resulted in materially different impairment loss recognition. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements and
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio” for more information on
impairment recognition on securities. In addition, we estimate that the future expected principal and interest shortfall on
impaired available-for-sale securities will be significantly less than the probable impairment loss required to be recorded
under GAAP, as we expect these shortfalls to be less than the recent fair value declines. The portion of the impairment
charges associated with these expected recoveries is recognized as net interest income in future periods.
Realizability of Net Deferred Tax Assets
We use the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, “Accounting for
Income Taxes,” or SFAS 109. Under this method, deferred tax assets and liabilities are recognized based upon the expected
future tax consequences of existing temporary differences between the financial reporting and the tax reporting basis of
assets and liabilities using enacted statutory tax rates. Valuation allowances are recorded to reduce net deferred tax assets
when it is more likely than not that a tax benefit will not be realized. The realization of these net deferred tax assets is
dependent upon the generation of sufficient taxable income or upon our intent and ability to hold available-for-sale debt
securities until the recovery of any temporary unrealized losses. On a quarterly basis, our management determines whether a
valuation allowance is necessary. In so doing, our management considers all evidence currently available, both positive and
negative, in determining whether, based on the weight of that evidence, it is more likely than not that the net deferred tax
assets will be realized. For more information about the evidence that management considers, see “NOTE 14: INCOME
TAXES” to our consolidated financial statements.
The consideration of this evidence requires significant estimates, assumptions and judgments, particularly about our
financial condition and results of operations for several years into the future and our intent and ability to hold
available-for-sale debt securities with temporary unrealized losses until recovery. As discussed in “RISK FACTORS,” recent
events fundamentally affecting our control, management and operations are likely to affect our future financial condition and
results of operations. These events have resulted in a variety of uncertainties regarding our future operations, our business
objectives and strategies and our future profitability, the impact of which cannot be reliably forecasted at this time. As such,
any changes in these estimates, assumptions or judgments may have a material effect on our financial position and results of
operations.
As described in “NOTE 14: INCOME TAXES” to our consolidated financial statements, our management determined
that, as of December 31, 2008, it was more likely than not that we would not realize the portion of our net deferred tax
assets that is dependent upon the generation of future taxable income. This determination was driven by recent events and
the resulting uncertainties that existed as of December 31, 2008 that are discussed in “RISK FACTORS.” As a result, we
recorded an additional valuation allowance against these net deferred tax assets at December 31, 2008. The valuation
allowance recorded in the third and fourth quarters had a material effect on our financial position as of December 31, 2008
and our results of operations for 2008. It is possible that, in future periods, the uncertainties regarding our future operations
and profitability could be resolved such that it could become more likely than not that these net deferred tax assets would be
realized due to the generation of sufficient taxable income. If that were to occur, our management would assess the need for
a reduction of the valuation allowance, which could have a material effect on our financial position and results of operations
in the period of the reduction.
Also, as described in “NOTE 14: INCOME TAXES” to our consolidated financial statements, our management has
determined that a valuation allowance is not necessary for the portion of our net deferred tax assets that is dependent upon
our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized losses. These
temporary unrealized losses have only impacted comprehensive income, not income from continuing operations or our
taxable income, nor will they impact income from continuing operations or taxable income if they are held to maturity. As
such, the realization of this deferred tax asset is not dependent upon the generation of sufficient taxable income but is instead
dependent on our intent and ability to hold these securities until recovery, which may be at maturity. The conclusion by
management that these unrealized losses are temporary and that we have the intent and ability to hold these securities until
recovery requires significant estimates, assumptions and judgments, as described above in “Impairment Recognition on
Investments in Securities.” Any changes in these estimates, assumptions or judgments in future periods may result in the
recognition of an other-than-temporary impairment, which would result in some of this deferred tax asset not being realized
and may have a material effect on our financial position and results of operations.
Accounting Changes and Recently Issued Accounting Pronouncements
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for
more information concerning our accounting policies and recently issued accounting pronouncements, including those that
we have not yet adopted and that will likely affect our consolidated financial statements.
139 Freddie Mac