Freddie Mac 2010 Annual Report Download - page 243

generated in 2009 and expected to be generated in 2010, as well as amounts related to the amortization of net deferred losses
on pre-2008 closed cash flow hedges.
Deferred Tax Assets, Net
The sources and tax effects of temporary differences that give rise to significant portions of deferred tax assets and
liabilities for the years ended December 31, 2010 and 2009 are presented in Table 14.3.
Table 14.3 — Deferred Tax Assets, Net
2010 2009
(in millions)
Deferred tax assets:
Deferred fees . ........................................................................ $ 1,561 $ 1,613
Basis differences related to derivative instruments . . .............................................. 5,014 4,473
Credit related items and reserve for loan losses .................................................. 17,850 16,296
Basis differences related to assets held for investment .............................................. — 1,361
Unrealized (gains) losses related to available-for-sale securities ....................................... 5,211 11,101
LIHTC and AMT credit carryforward ......................................................... 2,360 1,598
Net operating loss carryforward, net of unrecognized tax benefits ...................................... 12,122 —
Other items, net ....................................................................... 268 67
Total deferred tax assets .................................................................. 44,386 36,509
Deferred tax liabilities:
Basis differences related to assets held for investment .............................................. (5,270) —
Basis differences related to debt . ........................................................... (192) (300)
Total deferred tax liability ................................................................ (5,462) (300)
Valuation allowance
(1)
..................................................................... (33,381) (25,108)
Deferred tax assets, net . . .................................................................. $ 5,543 $ 11,101
(1) The valuation allowance as of December 31, 2010 includes $3.1 billion related to the adoption of the accounting standards for transfers of financial
assets and consolidation of VIEs. See “NOTE: 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information.
We use the asset and liability method to account for income taxes in accordance with the accounting standards 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. 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 our net deferred tax assets is dependent upon
the generation of sufficient taxable income in available carryback years from current operations and unrecognized tax
benefits, and upon our intent and ability to hold available-for-sale debt securities until the recovery of any temporary
unrealized losses. On a quarterly basis, we consider all evidence currently available, both positive and negative, in
determining whether, based on the weight of that evidence, the net deferred tax assets will be realized or whether the
valuation allowance should be adjusted.
Events since our entry into conservatorship, including those described in “NOTE 3: CONSERVATORSHIP AND
RELATED MATTERS,” fundamentally affect our control, management, and operations and 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. In evaluating our need for a valuation allowance, we considered all of the events and evidence
discussed above, in addition to: (a) our three-year cumulative loss position; (b) our carryback and carryforward availability;
(c) our difficulty in predicting unsettled circumstances; and (d) our conclusion that we have the intent and ability to hold our
available-for sale securities to the recovery of any temporary unrealized losses.
Subsequent to the date of our entry into conservatorship, we determined that it was more likely than not that a portion
of our net deferred tax assets would not be realized due to our inability to generate sufficient taxable income and, therefore,
we recorded a valuation allowance. After evaluating all available evidence, including the events and developments related to
our conservatorship, volatility in the economy, and related difficulty in forecasting future profit levels, we reached a similar
conclusion in subsequent quarters, including in the fourth quarter of 2010. We increased our valuation allowance by
$8.3 billion in total during 2010. The $8.3 billion increase during 2010 was primarily attributable to the creation of a net
operating loss carryforward in 2010 and other temporary differences generated during the year, as well as a $3.1 billion
increase attributable to the adoption of the accounting standards for transfers of financial assets and consolidation of VIEs.
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information on our adoption of these accounting
standards. Our total valuation allowance as of December 31, 2010 was $33.4 billion. As of December 31, 2010, after
consideration of the valuation allowance, we had a net deferred tax asset of $5.5 billion primarily representing the tax effect
of unrealized losses on our available-for-sale securities. We believe the deferred tax asset related to these unrealized losses is
more likely than not to be realized because of our conclusion that we have the intent and ability to hold our available-for-
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