Freddie Mac 2008 Annual Report Download - page 261

Fair Value Election
On January 1, 2008, we adopted SFAS 159, which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not required to be measured at fair value. We elected the fair value option for certain
available-for-sale mortgage-related securities, foreign-currency denominated debt and investments in securities classified as
available-for-sale securities and identified as in the scope of EITF 99-20. In addition, we elected the fair value option for
multifamily held-for-sale mortgage loans in the third quarter of 2008. For additional information regarding the adoption of
SFAS 159, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Recently Adopted Accounting
Standards.”
Certain Available-For-Sale Securities with Fair Value Option Elected
We elected the fair value option for certain available-for-sale securities held in our mortgage-related investments
portfolio to better reflect the natural offset these securities provide to fair value changes recorded on our guarantee asset. We
record fair value changes on our guarantee asset through our consolidated statements of operations. However, we historically
classified virtually all of our securities as available-for-sale and recorded those fair value changes in AOCI. The securities
selected for the fair value option include principal only strips and certain pass-through and Structured Securities that contain
positive duration features that provide offset to the negative duration associated with our guarantee asset. We will continually
evaluate new security purchases to identify the appropriate security mix to classify as trading to match the changing duration
features of our guarantee asset and the securities that provide offset.
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. Under
EITF 99-20 for available-for-sale securities, when an impairment is considered other-than-temporary, the impairment amount
is recorded in our consolidated statements of operations and subsequently recognized as interest income as long as the
contractual cash flows occur. Any subsequent periodic increases in the value of the security are recognized through AOCI.
By electing the fair value option for these instruments, we will reflect valuation changes through our consolidated statements
of operations in the period they occur, including increases in value.
For mortgage-related securities and investments in securities that are selected for the fair value option and classified as
trading securities subsequently, the change in fair value for the year ended December 31, 2008 was recorded in gains (losses)
on investment activity in our consolidated statements of operations. See “NOTE 5: INVESTMENTS IN SECURITIES” for
additional information regarding the net unrealized gains (losses) on trading securities, which include gains (losses) for other
items that are not selected for the fair value option. Related interest income continues to be reported as interest income in
our consolidated statements of operations using effective interest methods. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES — Investments in Securities” for additional information about the measurement and recognition
of interest income on investments in securities.
Foreign-Currency Denominated Debt with the Fair Value Option Elected
In the case of foreign-currency denominated debt, we have entered into derivative transactions that effectively convert
these instruments to U.S. dollar denominated floating rate instruments. We have historically recorded the fair value changes
on these derivatives through our consolidated statements of operations in accordance with SFAS 133. However, the
corresponding offsetting change in fair value that occurred in the debt as a result of changes in interest rates was not
permitted to be recorded in our consolidated statements of operations unless we pursued hedge accounting. As a result, our
consolidated statements of operations reflected only the fair value changes of the derivatives and not the offsetting fair value
changes in the debt resulting from changes in interest rates. Therefore, we have elected the fair value option on the debt
instruments to better reflect the economic offset that naturally results from the debt due to changes in interest rates. We
currently do not issue foreign-currency denominated debt and use of the fair value option in the future for these types of
instruments will be evaluated on a case-by-case basis for any new issuances of this type of debt.
The changes in fair value of foreign-currency denominated debt of $406 million for the year ended December 31, 2008
were recorded in gains (losses) on foreign-currency denominated debt recorded at fair value in our consolidated statements of
operations. The changes in fair value related to fluctuations in exchange rates and interest rates were $96 million for the year
ended December 31, 2008. The remaining changes in the fair value of $310 million for year ended December 31, 2008 were
attributable to changes in the instrument-specific credit risk.
The changes in fair value attributable to changes in instrument-specific credit risk were determined by comparing the
total change in fair value of the debt to the total change in fair value of the interest rate and foreign currency derivatives
used to hedge the debt. Any difference in the fair value change of the debt compared to the fair value change in the
derivatives is attributed to instrument-specific credit risk.
The difference between the aggregate fair value and aggregate unpaid principal balance for foreign-currency
denominated debt due after one year is $445 million at December 31, 2008. Related interest expense continues to be reported
258 Freddie Mac