Freddie Mac 2008 Annual Report Download - page 202

or payable, are reported as derivative liabilities, net. We offset fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed
with the same counterparty under a master netting agreement in accordance with FASB Staff Position, or FSP, No. FIN 39-1,
“Amendment of FASB Interpretation No. 39,” or FSP FIN 39-1. Changes in fair value and interest accruals on derivatives are
recorded as derivative gains (losses) in our consolidated statements of operations.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. In connection with
the adoption of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements
No. 133 and 140,” or SFAS 155, on January 1, 2007, we elected to measure newly acquired or issued financial instruments
that contain embedded derivatives at fair value, with changes in fair value recorded in our consolidated statements of
operations. At December 31, 2008, we did not have any embedded derivatives that were bifurcated and accounted for as
freestanding derivatives.
At December 31, 2008 and 2007, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to terminated or de-designated cash flow hedge relationships. These deferred gains and
losses on closed cash flow hedges are recognized in earnings as the originally forecasted transactions affect earnings. If it
becomes probable the originally forecasted transaction will not occur, the associated deferred gain or loss in AOCI would be
reclassified to earnings immediately. When market conditions warrant, we may enter into certain commitments to forward
sell mortgage-related securities that we will account for as cash flow hedges.
During 2006, our hedge accounting relationships primarily consisted of fair value hedges of benchmark interest-rate risk
and/or foreign currency risk on existing fixed-rate debt.
The changes in fair value of the derivatives in cash flow hedge relationships were recorded as a separate component of
AOCI to the extent the hedge relationships were effective, and amounts were reclassified to earnings when the forecasted
transaction affected earnings.
The changes in fair value of the derivatives in fair value relationships were recorded in earnings along with the change
in the fair value of the hedged debt. Any difference was reflected as hedge ineffectiveness and was recorded in other income.
REO
REO is initially recorded at fair value less costs to sell and is subsequently carried at the lower-of-cost-or-fair-value less
costs to sell. When we acquire REO, losses arise when the carrying basis of the loan (including accrued interest) exceeds the
fair value of the foreclosed property, net of estimated costs to sell and expected recoveries through credit enhancements.
Losses are charged-off against the allowance for loan losses at the time of acquisition. REO gains arise and are recognized
immediately in earnings when the fair market value of the foreclosed property less costs to sell and credit enhancements
exceeds the carrying basis of the loan (including accrued interest). Amounts we expect to receive from third-party insurance
or other credit enhancements are recorded when the asset is acquired. The receivable is adjusted when the actual claim is
filed, and is a component of accounts and other receivables, net on our consolidated balance sheets. Material development
and improvement costs relating to REO are capitalized. Operating expenses on the properties are included in REO operations
income (expense). Estimated declines in REO fair value that result from ongoing valuation of the properties are provided for
and charged to REO operations income (expense) when identified. Any gains and losses from REO dispositions are included
in REO operations income (expense).
Income Taxes
We use the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, “Accounting for
Income Taxes.” 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. To the extent tax laws change, deferred tax assets and liabilities are adjusted,
when necessary, in the period that the tax change is enacted. 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. 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. For
more information about the evidence that management considers and our determination of the need for a valuation
allowance, see “NOTE 14: INCOME TAXES.”
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