Freddie Mac 2008 Annual Report Download - page 201

down to fair value, with the loss recorded to gains (losses) on investment activity. Based on the new cost basis, the deferred
amounts related to the impaired security were amortized over the security’s remaining life in a manner consistent with the
amount and timing of the future estimated cash flows. The security cost basis was not changed for subsequent recoveries in
fair value.
On January 1, 2008, for available-for-sale securities identified as within the scope of EITF 99-20, we elected the fair
value option to better reflect the valuation changes that occur subsequent to impairment write-downs recorded on these
instruments. By electing the fair value option for these instruments, we reflect valuation changes through our consolidated
statements of operations in the period they occur, including increases in value. For additional information on our election of
the fair value option, see “Recently Adopted Accounting Standards” and “NOTE 17: FAIR VALUE DISCLOSURES.”
Gains and losses on the sale of securities are included in gains (losses) on investment activity, including those gains
(losses) reclassified into earnings from AOCI. We use the specific identification method for determining the cost of a
security in computing the gain or loss.
Repurchase and Resale Agreements
We enter into repurchase and resale agreements primarily as an investor or to finance our security positions. Such
transactions are accounted for as secured financings when the transferor does not relinquish control.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either short-term (due within one year)
or long-term (due after one year), based on their remaining contractual maturity. The classification of interest expense on
debt securities as either short-term or long-term is based on the original contractual maturity of the debt security.
Debt securities other than foreign-currency denominated debt are reported at amortized costs. Deferred items including
premiums, discounts, and hedging-related basis adjustments are reported as a component of debt securities, net. Issuance
costs are reported as a component of other assets. These items are amortized and reported through interest expense using the
effective interest method over the contractual life of the related indebtedness. Amortization of premiums, discounts and
issuance costs begins at the time of debt issuance. Amortization of hedging-related basis adjustments is initiated upon the
termination of the related hedge relationship.
On January 1, 2008, we elected the fair value option on foreign-currency denominated debt and report them at fair
value. The change in fair value of foreign-currency denominated debt for 2008 was reported as gains (losses) on foreign-
currency denominated debt recorded at fair value in our consolidated statements of operations. Upfront costs and fees on
foreign-currency denominated debt are recognized in earnings as incurred and not deferred. For additional information on our
election of the fair value option, see “Recently Adopted Accounting Standards” and “NOTE 17: FAIR VALUE
DISCLOSURES.” Prior to 2008, foreign-currency denominated debt issuances were recorded at amortized cost and translated
into U.S. dollars using foreign exchange spot rates at the balance sheet dates and any resulting gains or losses were reported
in non-interest income (loss) — foreign-currency gains (losses), net.
When we repurchase or call outstanding debt securities, we recognize a gain or loss related to the difference between
the amount paid to redeem the debt security and the carrying value, including any remaining unamortized deferred items
(e.g., premiums, discounts, issuance costs and hedging-related basis adjustments). The balances of remaining deferred items
are reflected in earnings in the period of extinguishment as a component of gains (losses) on debt retirement.
Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security and
satisfaction of an existing debt security are accounted for as either an extinguishment of the existing debt security or a
modification, or debt exchange, of an existing debt security. If the debt securities have substantially different terms, the
transaction is accounted for as an extinguishment of the existing debt security with recognition of any gains or losses in
earnings in gains (losses) on debt retirement, the issuance of a new debt security is recorded at fair value, fees paid to the
creditor are expensed, and fees paid to third parties are deferred and amortized into interest expense over the life of the new
debt obligation using the effective interest method. If the terms of the existing debt security and the new debt security are
not substantially different, the transaction is accounted for as a debt exchange, fees paid to the creditor are deferred and
amortized over the life of the modified debt security using the effective interest method, and fees paid to third parties are
expensed as incurred. In a debt exchange, the following are considered to be a basis adjustment on the new debt security and
are amortized as an adjustment of interest expense over the remaining term of the new debt security: (a) the fees associated
with the new debt security and any existing unamortized premium or discount; (b) concession fees; and (c) hedge gains and
losses on the existing debt security.
Derivatives
We account for our derivatives pursuant to SFAS 133, as amended. Derivatives are reported at their fair value on our
consolidated balance sheets. Derivatives in an asset position, including net derivative interest receivable or payable, are
reported as derivative assets, net. Similarly, derivatives in a net liability position, including net derivative interest receivable
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