Freddie Mac 2011 Annual Report Download - page 212

Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements;
and (b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has
made significant estimates in preparing the financial statements, including, but not limited to, establishing the allowance
for loan losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, assessing
impairments on investments, and assessing the realizability of net deferred tax assets. Actual results could be different
from these estimates.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. The net earnings
attributable to the noncontrolling interests in our consolidated subsidiaries are reported separately in the consolidated
statements of income and comprehensive income as comprehensive (income) loss attributable to noncontrolling interest.
All material intercompany transactions have been eliminated in consolidation.
For each entity with which we are involved, we determine whether the entity should be consolidated in our financial
statements. We consolidate entities in which we have a controlling financial interest. The method for determining whether
a controlling financial interest exists varies depending on whether the entity is a VIE or non-VIE. A VIE is an entity:
(a) that has a total equity investment at risk that is not sufficient to finance its activities without additional subordinated
financial support provided by another party; or (b) where the group of equity holders does not have: (i) the power, through
voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic
performance; (ii) the obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected
residual returns.
Our policy is to consolidate VIEs in which we hold a controlling financial interest and are therefore deemed to be
the primary beneficiary. An enterprise has a controlling financial interest in, and thus is deemed to be the primary
beneficiary of, a VIE if it has both: (a) the power to direct the activities of the VIE that most significantly impact its
economic performance; and (b) exposure to losses or benefits of the VIE that could potentially be significant to the VIE.
We perform ongoing assessments to determine if we are the primary beneficiary of the VIEs with which we are involved
and, as such, conclusions may change over time as the nature and extent of our involvement changes.
Historically, we were exempt from applying the accounting guidance applicable to consolidation of VIEs to the
majority of our securitization trusts, as well as certain of our investment securities issued by third parties, because they
had been designed to meet the definition of a QSPE. Upon the effective date of the amendments to the accounting
guidance for transfers of financial assets and consolidation of VIEs, the concept of a QSPE and the related scope
exception from the consolidation provisions applicable to VIEs were removed from GAAP; consequently, all of our
securitization trusts, as well as our investment securities issued by third parties that had previously been QSPEs, became
subject to a consolidation assessment. The results of our consolidation assessments on certain types of securitization trusts
are explained in the paragraphs that follow.
We use securitization trusts in our securities issuance process that are VIEs. We are the primary beneficiary of trusts
that issue our single-family PCs and certain Other Guarantee Transactions. See “NOTE 3: VARIABLE INTEREST
ENTITIES” for more information. When we transfer assets into a VIE that we consolidate at the time of the transfer (or
shortly thereafter), we recognize the assets and liabilities of the VIE at the amounts that they would have been recognized
if they had not been transferred, and no gain or loss is recognized on these transfers. For all other VIEs that we
consolidate, we recognize the assets and liabilities of the VIE at fair value, and we recognize a gain or loss for the
difference between: (a) the fair value of the consideration paid and the fair value of any noncontrolling interests held by
third parties; and (b) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated.
For entities that are not VIEs, the usual condition of a controlling financial interest is ownership of a majority voting
interest in an entity. We use the equity method of accounting for entities over which we have the ability to exercise
significant influence, but not control.
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities
Overview
When we securitize single-family mortgages that we purchase, we issue mortgage-related securities called PCs that
can be sold to investors or held by us. Guarantor swaps are transactions where financial institutions exchange mortgage
loans for PCs backed by these mortgage loans. Multilender swaps are similar to guarantor swaps, except that formed PC
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