Freddie Mac 2011 Annual Report Download - page 221

of its amortized cost basis. Where such an assertion has not been made, the security’s entire decline in fair value is
deemed to be other than temporary and is recorded within our consolidated statements of income and comprehensive
income as net impairment of available-for-sale securities recognized in earnings.
We elected the fair value option for available-for-sale securities identified as within the scope of the accounting
guidance for investments in beneficial interests in securitized financial assets to better reflect the valuation changes that
occur subsequent to impairment write-downs recorded on these instruments. By electing the fair value option for these
instruments, we reflect valuation changes through our consolidated statements of income and comprehensive income in
the period they occur, including increases in value. For additional information on our election of the fair value option, see
“NOTE 17: FAIR VALUE DISCLOSURES.”
Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method
for determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale and those securities where we elected the fair value option,
we classify the cash flows as investing activities because we hold these securities for investment purposes. In cases where
the transfer of available-for-sale securities represents a secured borrowing, we classify the related cash flows as financing
activities.
Repurchase and Resale Agreements and Dollar Roll Transactions
We enter into repurchase and resale agreements primarily as an investor or to finance certain of our security
positions. Such transactions are accounted for as secured financings because the transferor does not relinquish control over
the transferred assets.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently repurchase
(or purchase and subsequently resell) agency securities. When these transactions involve securities issued by consolidated
entities, they are treated as issuances and extinguishments of debt. When these transactions involve securities issued by
entities we do not consolidate, they are treated as purchases and sales as the security initially transferred is not required to
be the same or substantially the same as the security subsequently returned.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt.
As a result of the adoption of the amendments to the accounting guidance on transfers of financial assets and the
consolidation of VIEs, we consolidated our single-family PC trusts and certain Other Guarantee Transactions in our
financial statements commencing January 1, 2010. Consequently, PCs and Other Guarantee Transactions issued by the
consolidated trusts and held by third parties are recognized as debt securities of consolidated trusts held by third parties
on our consolidated balance sheets. The debt securities of our consolidated trusts are prepayable without penalty at any
time. Other debt represents short-term and long-term debt securities that we issue to third parties to fund our general
business activities.
Both debt of our consolidated trusts and other debt, except for certain debt for which we elected the fair value
option, are reported at amortized cost. Deferred items, including premiums, discounts, and hedging-related basis
adjustments are reported as a component of total debt, net. Issuance costs are reported as a component of other assets.
These items are amortized and reported through interest expense using the effective interest method over the contractual
life of the related indebtedness. Amortization of premiums, discounts, and issuance costs begins at the time of debt
issuance. Amortization of hedging-related basis adjustments is initiated upon the discontinuation of the related hedge
relationship.
We elected the fair value option on foreign-currency denominated debt and certain other debt securities. The change
in fair value for debt recorded at fair value is reported as gains (losses) on debt recorded at fair value in our consolidated
statements of income and comprehensive income. Upfront costs and fees on foreign-currency denominated debt are
recognized in earnings as incurred and not deferred. For additional information on our election of the fair value option,
see “NOTE 17: FAIR VALUE DISCLOSURES.”
When we purchase a PC or a REMIC and Other Structured Security that is a single-class security from a third party,
we extinguish the debt of the related PC trusts and recognize a gain or loss related to the difference between the amount
paid to redeem the debt security and its carrying value, adjusted for any related purchase commitments accounted for as
derivatives, in earnings as a component of gains (losses) on extinguishment of debt securities of consolidated trusts. Cash
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