Freddie Mac 2009 Annual Report Download - page 198

Realizability of Deferred Tax Assets, Net
We use the asset and liability method to account for income taxes pursuant to the accounting standards for income tax.
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. 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. For more
information about the evidence that management considers, see “NOTE 15: INCOME TAXES” to our consolidated financial
statements.
The consideration of this evidence requires significant estimates, assumptions and judgments, particularly about our
future financial condition and results of operations and our intent and ability to hold available-for-sale debt securities with
temporary unrealized losses until recovery. As discussed in “RISK FACTORS,” recent events fundamentally affecting our
control, management and operations are likely to affect our future financial condition and results of operations. These events
have resulted in a variety of uncertainties regarding our future operations, our business objectives and strategies and our
future profitability, the impact of which cannot be reliably forecasted at this time. As such, any changes in these estimates,
assumptions or judgments may have a material effect on our financial position and results of operations.
As described in “NOTE 15: INCOME TAXES” to our consolidated financial statements, our management determined
that, as of December 31, 2009, 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, 2009 that are discussed in “RISK FACTORS.” As a result, we
recorded an additional valuation allowance against these net deferred tax assets at December 31, 2009. The valuation
allowance recorded had a material effect on our financial position as of December 31, 2009 and our results of operations for
2009. It is possible that, in future periods, the uncertainties regarding our future operations and profitability could be
resolved such that it could become more likely than not that these net deferred tax assets would be realized due to the
generation of sufficient taxable income. If that were to occur, our management would assess the need for a reduction of the
valuation allowance, which could have a material effect on our financial position and results of operations in the period of
the reduction.
Also, as described in “NOTE 15: INCOME TAXES” to our consolidated financial statements, our management has
determined that a valuation allowance is not necessary for the portion of our net deferred tax assets that is dependent upon
our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized losses. These
temporary unrealized losses have only impacted AOCI, not income from continuing operations or our taxable income, nor
will they impact income from continuing operations or taxable income if they are held to maturity. As such, the realization
of this deferred tax asset is not dependent upon the generation of sufficient taxable income but rather on our intent and
ability to hold these securities until recovery, which may be at maturity. The conclusion by management that these
unrealized losses are temporary and that we have the intent and ability to hold these securities until recovery requires
significant estimates, assumptions and judgments, as described above in “Impairment Recognition on Investments in
Securities.” Any changes in these estimates, assumptions or judgments in future periods may result in the recognition of an
other-than-temporary impairment, which would result in some of this deferred tax asset not being realized and may have a
material effect on our financial position and results of operations.
Accounting Changes and Recently Issued Accounting Pronouncements
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial statements for
more information concerning our accounting policies and recently issued accounting pronouncements, including those that
we have not yet adopted and that will likely affect our consolidated financial statements.
195 Freddie Mac