Freddie Mac 2011 Annual Report Download - page 220

We record purchases and sales of securities that are specifically exempt from the requirements of derivatives and
hedge accounting on a trade date basis. Securities underlying forward purchases and sales contracts that are not exempt
from the requirements of derivatives and hedge accounting are recorded on the expected settlement date with a
corresponding commitment recorded on the trade date.
When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have
issued, we account for these securities as investments in debt securities, as we are investing in the debt securities of a
non-consolidated entity. We consolidate the trusts that issue these securities when we hold substantially all of the
outstanding beneficial interests issued by the trusts. We recognize interest income on the securities and interest expense on
the debt we issued. See “Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities —
Purchases and Sales of Freddie Mac Mortgage-Related Securities” for additional information on accounting for purchases
of PCs and beneficial interests issued by resecuritization trusts.
In connection with transfers of financial assets that qualified as sales prior to the adoption of the amendments to the
accounting guidance on transfers of financial assets and the consolidation of VIEs, we may have retained individual
securities not transferred to third parties upon the completion of a securitization transaction. These securities may have
been backed by mortgage-related assets purchased from our customers, PCs, and REMICs and Other Structured Securities.
The securities we acquired in these transactions were classified as available-for-sale or trading and are considered
guaranteed investments. Therefore, the fair values of these securities reflect that they are considered to be of high credit
quality and the securities are not subject to credit-related impairments. They are subject to the credit risk associated with
the underlying collateral. Therefore, our exposure to credit losses on collateral underlying our retained securitization
interests was recorded within our reserve for guarantee losses.
For most of our investments in securities, interest income is recognized using the effective interest method. Deferred
items, including premiums, discounts, and other basis adjustments, are amortized into interest income over the contractual
lives of the securities.
For certain investments in securities, interest income is recognized using the prospective effective interest method.
We specifically apply this accounting to beneficial interests in securitized financial assets that: (a) can contractually be
prepaid or otherwise settled in such a way that we may not recover substantially all of our recorded investment; (b) are
not of high credit quality at the acquisition date; or (c) have been determined to be other-than-temporarily impaired. We
recognize as interest income (over the life of these securities) the excess of all estimated cash flows attributable to these
interests over their book value using the effective interest method. We update our estimates of expected cash flows
periodically and recognize changes in the calculated effective interest rate on a prospective basis.
We recognize impairment losses on available-for-sale securities within our consolidated statements of income and
comprehensive income as net impairment of available-for-sale securities recognized in earnings when we conclude that a
decrease in the fair value of a security is other-than-temporary. On April 1, 2009, we prospectively adopted an amendment
to the accounting guidance for investments in debt and equity securities. This amendment changed the recognition,
measurement, and presentation of other-than-temporary impairment for debt securities.
We conduct quarterly reviews to identify and evaluate each available-for-sale security that has an unrealized loss for
other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less
than its amortized cost basis.
We recognize other-than-temporary impairment in earnings if one of the following conditions exists: (a) we have the
intent to sell the security; (b) it is more likely than not that we will be required to sell the security before recovery of its
unrealized loss; or (c) we do not expect to recover the amortized cost basis of the security. If we do not intend to sell the
security and it is not more likely than not that we will be required to sell the security prior to recovery of its unrealized
loss, we recognize only the credit component of other-than-temporary impairment in earnings and the amounts attributable
to all other factors are recognized, net of tax, in AOCI. The credit component represents the amount by which the present
value of cash flows expected to be collected from the security is less than the amortized cost basis of the security. The
evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary contemplates numerous
factors. We perform an evaluation on a security-by-security basis considering all available information and our analysis is
refined where the current fair value or other characteristics of the security warrant. The relative importance of this
information varies based on the facts and circumstances surrounding each security, as well as the economic environment
at the time of assessment. See “NOTE 7: INVESTMENTS IN SECURITIES — Impairment Recognition on Investments
in Securities” for a discussion of important factors we consider in our evaluation.
For the majority of our available-for-sale securities in an unrealized loss position, we have asserted that we have no
intent to sell and that we believe it is not more likely than not that we will be required to sell the security before recovery
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