Freddie Mac 2011 Annual Report Download - page 222

flows related to debt securities issued by our consolidated trusts are classified as either financing activities (e.g.,
repayment of principal to PC holders) or operating activities (e.g., interest payments to PC holders included within net
income (loss)). Other than interest paid, cash flows related to other debt are classified as financing activities. Interest paid
on other debt is classified as operating activities.
When we repurchase or call outstanding other debt, we recognize a gain or loss related to the difference between the
amount paid to redeem the debt security and the carrying value in earnings as a component of gains (losses) on retirement
of other debt. Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt
security and satisfaction of an existing debt security are accounted for as either an extinguishment or a modification of an
existing debt security. If the debt securities have substantially different terms, the transaction is accounted for as an
extinguishment of the existing debt security. The issuance of a new debt security is recorded at fair value, fees paid to the
creditor are expensed and fees paid to third parties are deferred and amortized into interest expense over the life of the
new debt security using the effective interest method. If the terms of the existing debt security and the new debt security
are not substantially different, the transaction is accounted for as a modification of the existing debt. Fees paid to the
creditor are deferred and amortized over the life of the modified unsecured debt security using the effective interest
method and fees paid to third parties are expensed as incurred.
Derivatives
Derivatives are reported at their fair value on our consolidated balance sheets. Derivatives in a net asset position,
including net derivative interest receivable or payable, are reported as derivative assets, net. Similarly, derivatives in a net
liability position, including net derivative interest receivable or payable, are reported as derivative liabilities, net. We offset
fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair
value amounts recognized for derivative instruments executed with the same counterparty under a master netting
agreement. Changes in fair value and interest accruals on derivatives are recorded as derivative gains (losses) in our
consolidated statements of income and comprehensive income.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. In accordance
with an amendment to derivatives and hedging accounting guidance regarding certain hybrid financial instruments, we
elected to measure newly acquired or issued financial instruments that contain embedded derivatives at fair value, with
changes in fair value recorded in our consolidated statements of income and comprehensive income. At December 31,
2011 and 2010, we did not have any embedded derivatives that were bifurcated and accounted for as freestanding
derivatives.
At December 31, 2011 and 2010, we did not have any derivatives in hedge accounting relationships; however, there
are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings as the originally
forecasted transactions affect earnings. If it becomes probable the originally forecasted transaction will not occur, the
associated deferred gain or loss in AOCI would be reclassified to earnings immediately.
In the consolidated statements of cash flows, cash flows related to the acquisition and termination of derivatives,
other than forward commitments, are generally classified in investing activities. Cash flows related to forward
commitments are classified within the section of the consolidated statements of cash flows in accordance with the cash
flows of the financial instruments to which they relate.
REO
REO is initially recorded at fair value less costs to sell and is subsequently carried at the lower of cost or fair value
less costs to sell. When we acquire REO, losses arise when the carrying basis of the loan (including accrued interest)
exceeds the fair value of the foreclosed property, net of estimated costs to sell and expected recoveries through credit
enhancements. Losses are charged off against the allowance for loan losses at the time of REO acquisition. REO gains
arise and are recognized immediately in earnings when the fair value of the foreclosed property less costs to sell plus
expected recoveries through credit enhancements exceeds the carrying basis of the loan (including all amounts due from
the borrower). Amounts we expect to receive from third-party insurance or other credit enhancements are recorded as
receivables when REO is acquired. The receivable is adjusted when the actual claim is filed and is reported as a
component of other assets on our consolidated balance sheets. Material development and improvement costs relating to
REO are capitalized. Operating expenses specifically identifiable with an REO property are included in REO operations
income (expense); all other expenses are recognized within other administrative expenses in our consolidated statement of
income and comprehensive income. Estimated declines in REO fair value that result from ongoing valuation of the
properties are provided for and charged to REO operations income (expense) when identified. Any gains and losses from
REO dispositions are included in REO operations income (expense).
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