Freddie Mac 2008 Annual Report Download - page 203

We account for tax positions taken or expected to be taken (and any associated interest and penalties) in accordance
with FIN 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” or FIN 48.In
particular, we recognize a tax position so long as it is more likely than not that it will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. We measure
the tax position at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
See “NOTE 14: INCOME TAXES” for additional information related to FIN 48.
Income tax expense (benefit) includes (a) deferred tax expense, which represents the net change in the deferred tax asset
or liability balance during the year plus any change in a valuation allowance, if any, and (b) current tax expense, which
represents the amount of tax currently payable to or receivable from a tax authority including any related interest and
penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and penalties). Income tax
expense (benefit) excludes the tax effects related to adjustments recorded to equity.
Stock-Based Compensation
We record compensation expense for stock-based compensation awards based on the grant-date fair value of the award
and expected forfeitures. Compensation expense is recognized over the period during which an employee is required to
provide service in exchange for the stock-based compensation award. The recorded compensation expense is accompanied by
an adjustment to additional paid-in capital on our consolidated balance sheets. The vesting period for stock-based
compensation awards is generally three to five years for options, restricted stock and restricted stock units. The vesting
period for the option to purchase stock under the Employee Stock Purchase Plan, or ESPP, was three months. See
“NOTE 11: STOCK-BASED COMPENSATION” for additional information.
The fair value of options to purchase shares of our common stock, including options issued pursuant to the ESPP, is
estimated using a Black-Scholes option pricing model, taking into account the exercise price and an estimate of the expected
life of the option, the market value of the underlying stock, expected volatility, expected dividend yield, and the risk-free
interest rate for the expected life of the option. The fair value of restricted stock and restricted stock unit awards is based on
the fair value of our common stock on the grant date.
Incremental compensation expense related to the modification of awards is based on a comparison of the fair value of
the modified award with the fair value of the original award before modification. We generally expect to settle our stock-
based compensation awards in shares. In limited cases, an award may be cash-settled upon a contingent event such as
involuntary termination. These awards are accounted for as an equity award until the contingency becomes probable of
occurring, when the award is reclassified from equity to a liability. We initially measure the cost of employee service
received in exchange for a stock-based compensation award of liability instruments based on the fair value of the award at
the grant date. The fair value of that award is remeasured subsequently at each reporting date through the settlement date.
Changes in the fair value during the service period are recognized as compensation cost over that period.
Excess tax benefits are recognized in additional paid-in capital. Cash retained as a result of the excess tax benefits is
presented in the consolidated statements of cash flows as financing cash inflows. The write-off of net deferred tax assets
relating to unrealized tax benefits associated with recognized compensation costs reduces additional paid-in capital to the
extent there are excess tax benefits from previous stock-based awards remaining in additional paid-in capital, with any
remainder reported as part of income tax expense (benefit).
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 and vested restricted stock units 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. The weighted average common shares outstanding for our basic earnings
per share calculation includes the weighted average number of shares during 2008 that are associated with the warrant for
our common stock issued to Treasury as part of the Purchase Agreement. This warrant is included since it is unconditionally
exercisable by the holder at a minimal cost of $.00001 per share. Diluted earnings per common share is determined using the
weighted average number of common shares during the period, adjusted for the dilutive effect of common stock equivalents.
Dilutive common stock equivalents reflect 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
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