Freddie Mac 2008 Annual Report Download - page 205

Table 1.1 summarizes the incremental effect on individual line items on our consolidated balance sheets upon the
adoption of SFAS 159.
Table 1.1 — Change in Accounting for the Fair Value Option — Impact on Financial Statements
Balance Sheet
January 1, 2008
prior to Adoption
Net Gain/(Losses)
upon Adoption
Balance Sheet
January 1, 2008
after Adoption
(in millions)
Investments in securities
(1)
............................................. $87,281 $ — $87,281
Total debt, net
(2)
.................................................... 19,091 276 18,815
Cumulative-effect adjustment (pre-tax) ................................. 276
Impact on deferred tax .............................................. (95)
Cumulative-effect adjustment (net of taxes)............................. 181
Reclassification from AOCI to retained earnings (accumulated deficit), net of taxes
(1)
. . . 850
Cumulative-effect adjustments to retained earnings (accumulated deficit) ....... $1,031
(1) Effective January 1, 2008, we elected the fair value option for certain available-for-sale mortgage-related securities that were identified as economic
offsets to the changes in fair value of the guarantee asset and certain available-for-sale mortgage-related securities identified as within the scope of
EITF 99-20. Subsequent to our election, these mortgage-related securities were classified as trading securities. The net gains/(losses) upon adoption
represent the reclassification of the related unrealized gains/(losses) from AOCI, net of taxes, to retained earnings (accumulated deficit).
(2) Effective January 1, 2008, our measurement basis for debt securities denominated in a foreign currency changed from amortized cost to fair value. The
difference between the carrying amount and fair value at the adoption of SFAS 159 was recorded as a cumulative-effect adjustment to retained earnings
(accumulated deficit).
Other Changes in Accounting Principles
Effective December 31, 2007, we retrospectively changed our method of accounting for our guarantee obligation: 1) to a
policy of no longer extinguishing our guarantee obligation when we purchase all or a portion of a guaranteed PC and
Structured Security from a policy of effective extinguishment through the recognition of a Participation Certificate residual
and 2) to a policy that amortizes our guarantee obligation into earnings in a manner that corresponds more closely to our
economic release from risk under our guarantee than our former policy, which amortized our guarantee obligation according
to the contractual expiration of our guarantee as observed by the decline in the unpaid principal balance of securitized
mortgage loans. While our previous accounting was acceptable, we believe the adopted method of accounting for our
guarantee obligation is preferable in that it significantly enhances the transparency and understandability of our financial
results, promotes uniformity in the accounting model for the credit risk retained in our primary credit guarantee business,
better aligns revenue recognition to the release from economic risk of loss under our guarantee, and increases comparability
with other similar financial institutions. Comparative financial statements of prior periods have been adjusted to apply the
new methods, retrospectively. The changes in accounting principles resulted in an increase to our total stockholders’ equity
of $1.1 billion at December 31, 2007.
On October 1, 2007, we adopted FSP FIN 39-1 which permits a reporting entity to 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. We elected to reclassify net
derivative interest receivable or payable and cash collateral held or posted, on our consolidated balance sheets, to derivative
assets, net and derivative liability, net, as applicable. Prior to reclassification, these amounts were recorded on our
consolidated balance sheets in accounts and other receivables, net, accrued interest payable, other assets and short-term debt,
as applicable. The change resulted in a decrease to total assets and total liabilities of $8.7 billion at the date of adoption,
October 1, 2007, and $7.2 billion at December 31, 2007. The adoption of FSP FIN 39-1 had no effect on our consolidated
statements of operations.
On January 1, 2007, we adopted FIN 48. FIN 48 provides a single model to account for uncertain tax positions and
clarifies accounting for income taxes by prescribing a minimum threshold that a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. As a result of adoption, we recorded a $181 million
increase to retained earnings (accumulated deficit) at January 1, 2007. See “NOTE 14: INCOME TAXES” for additional
information related to FIN 48.
On January 1, 2007, we adopted SFAS 155. SFAS 155 permits the fair value measurement for any hybrid financial
instrument with an embedded derivative that otherwise would require bifurcation. In addition, this statement requires an
evaluation of interests in securitized financial assets to identify instruments that are freestanding derivatives or that are hybrid
financial instruments containing an embedded derivative requiring bifurcation. We adopted SFAS 155 prospectively, and,
therefore, there was no cumulative effect of a change in accounting principle. In connection with the adoption of SFAS 155
on January 1, 2007, we elected to measure newly acquired interests in securitized financial assets that contain embedded
derivatives requiring bifurcation at fair value, with changes in fair value reflected in our consolidated statements of
operations. See “NOTE 5: INVESTMENTS IN SECURITIES” for additional information.
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