Freddie Mac 2008 Annual Report Download - page 192

Basis of Presentation
Our financial reporting and accounting policies conform to GAAP. Certain amounts in prior periods have been
reclassified to conform to the current presentation. We evaluate the materiality of identified errors in the financial statements
using both an income statement, or “rollover,” and a balance sheet, or “iron-curtain,” approach, based on relevant quantitative
and qualitative factors. Our approach is consistent with the Securities and Exchange Commission’s Staff Accounting Bulletin
No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements,” or SAB 108.
Net income (loss) includes certain adjustments to correct immaterial errors related to previously reported periods.
Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
(b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Actual results could
differ from those estimates.
Our estimates and judgments include, but are not limited to the following:
• estimating fair value for a significant portion of assets and liabilities, including financial instruments and real estate
owned, or REO, (See “NOTE 17: FAIR VALUE DISCLOSURES” for a discussion of our fair value estimates);
• estimating the expected amounts of forecasted issuances of debt;
• establishing the allowance for loan losses on loans held-for-investment and the reserve for guarantee losses on PCs;
• applying the static effective yield method of amortizing our guarantee obligation into earnings based on forecasted
unpaid principal balances, which requires adjustment when significant changes in economic events cause a shift in the
pattern of our economic release from risk;
• applying the effective interest method, which requires estimates of the expected future amounts of prepayments of
mortgage-related assets;
• assessing when impairments should be recognized on investments in securities and the subsequent accretion of
impairments using prospective amortization; and
• assessing the realizability of net deferred tax assets to determine our need for and amount of a valuation allowance.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. The equity and net earnings
attributable to the minority stockholder 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 operations as minority
interests in earnings (loss) of consolidated 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 a subsidiary and thus
consolidated in our financial statements. These subsidiaries include entities in which we hold more than 50% of the voting
rights or over which we have the ability to exercise control. Accordingly, we consolidate our two majority-owned REITs,
Home Ownership Funding Corporation and Home Ownership Funding Corporation II. Other subsidiaries consist of variable
interest entities, or VIEs, in which we are the primary beneficiary.
A VIE is an entity (a) that has a total equity investment at risk that is not sufficient to finance its activities without
additional subordinated financial support provided by another party or (b) where the group of equity holders does not have
(i) the ability to make significant decisions about the entity’s activities, (ii) the obligation to absorb the entity’s expected
losses or (iii) the right to receive the entity’s expected residual returns. We consolidate entities that are VIEs when we are the
primary beneficiary. We are considered the primary beneficiary of a VIE and thus consolidate the VIE when we absorb a
majority of its expected losses, receive a majority of its expected residual returns (unless another enterprise receives this
majority), or both. We determine if we are the primary beneficiary when we become involved in the VIE. If we are the
primary beneficiary, we reconsider this decision when we sell or otherwise dispose of all or part of our variable interests to
unrelated parties or if the VIE issues new variable interests to parties other than us or our related parties. Conversely, if we
are not the primary beneficiary, we reconsider this decision when we acquire additional variable interests in these entities.
See “NOTE 4: VARIABLE INTEREST ENTITIES” for more information. We regularly invest as a limited partner in
qualified low-income housing tax credit, or LIHTC, partnerships that are eligible for federal tax credits and that mostly are
VIEs. We are the primary beneficiary for certain of these LIHTC partnerships.
We use the equity method of accounting for entities over which we have the ability to exercise significant influence, but
not control, such as (a) entities that are not VIEs and (b) VIEs in which we have significant variable interests but are not the
primary beneficiary. We report our recorded investment as part of low-income housing tax credit partnerships equity
189 Freddie Mac