Freddie Mac 2011 Annual Report Download - page 225

(a) carrying value if the underlying assets are contributed by us to the trust and consolidated at the time of transfer; or
(b) fair value for the assets and liabilities that are consolidated under the securitization trusts established for our guarantor
swap program.
In light of the consolidation of our single-family PC trusts and certain Other Guarantee Transactions as discussed
above, effective January 1, 2010 we elected to change the amortization method for deferred items (e.g., premiums,
discounts, and other basis adjustments) related to mortgage loans and investments in securities. We made this change to
align the amortization method for these assets with the amortization method for deferred items associated with the related
liabilities. As a result of this change, deferred items are amortized into interest income using an effective interest method
over the contractual lives of these assets instead of the estimated life that was used for periods prior to 2010. It was
impracticable to retrospectively apply this change to prior periods, so we recognized this change as a cumulative effect
adjustment to the opening balance of retained earnings (accumulated deficit), and future amortization of these deferred
items will be recognized using this new method. The effect of the change in the amortization method for deferred items
was immaterial to our consolidated financial statements in 2010.
The cumulative effect of these changes in accounting principles was a net decrease of $11.7 billion to total equity
(deficit) as of January 1, 2010, which includes changes to the opening balances of retained earnings (accumulated deficit)
and AOCI. This net decrease was driven principally by: (a) the elimination of unrealized gains resulting from the
extinguishment of PCs held as investment securities upon consolidation of the PC trusts, representing the difference
between the UPB of the loans underlying the PC trusts and the fair value of the PCs, including premiums, discounts, and
other basis adjustments; (b) the elimination of the guarantee asset and guarantee obligation established for guarantees
issued to securitization trusts we consolidated; and (c) the application of our non-accrual policy to single-family seriously
delinquent mortgage loans consolidated as of January 1, 2010.
Change in the Impairment Model for Debt Securities
On April 1, 2009 we prospectively adopted an amendment to the accounting guidance for investments in debt and
equity securities, which provided additional guidance on accounting for and presenting impairment losses on debt
securities. This amendment changed the recognition, measurement and presentation of other-than-temporary impairment
for debt securities, and was intended to bring greater consistency to the timing of impairment recognition and provide
greater clarity to investors about the credit and non-credit components of impaired debt securities not expected to be sold.
It also changed: (a) the method for determining whether an other-than-temporary impairment exists; and (b) the amount of
an impairment charge to be recorded in earnings.
As a result of the adoption, we recognized a cumulative-effect adjustment, net of tax, of $15.0 billion to our opening
balance of retained earnings (accumulated deficit) on April 1, 2009, with a corresponding adjustment of $(9.9) billion, net
of tax, to AOCI. The cumulative adjustment reclassified the non-credit component of previously recognized other-than-
temporary impairments from retained earnings to AOCI. The difference between these adjustments of $5.1 billion
primarily represented the release of the valuation allowance previously recorded against the deferred tax asset that was no
longer required upon adoption of this amendment. See “NOTE 7: INVESTMENTS IN SECURITIES” for further
disclosures regarding our investments in securities and other-than-temporary impairments.
Recently Issued Accounting Guidance, Not Yet Adopted Within These Consolidated Financial Statements
Fair Value Measurement
In May 2011, the FASB issued amendments to the accounting guidance pertaining to fair value measurement and
disclosure. These amendments provide both: (a) clarification about the FASB’s intent about the application of existing fair
value measurement and disclosure requirements; and (b) changes to some of the principles or requirements for measuring
fair value or for disclosing information about fair value measurements. These amendments are effective for interim and
annual periods beginning after December 15, 2011 and are to be applied prospectively, with early adoption not permitted
by public companies. We do not expect that the adoption of these amendments will have a material impact on our
consolidated financial statements.
Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued an amendment to the guidance for transfers and servicing with regard to repurchase
agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before
their maturity. This amendment removes the criterion related to collateral maintenance from the transferor’s assessment of
effective control. It focuses the assessment of effective control on the transferor’s rights and obligations with respect to the
transferred financial assets and not whether the transferor has the practical ability to perform in accordance with those
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