Freddie Mac 2012 Annual Report Download - page 190

For more information on the effect of the Purchase Agreement on our business and capital management activities, and
the potential impact of making additional draws, see “BUSINESS — Conservatorship and Government Support for Our
Business.”
FAIR VALUE MEASUREMENTS AND ANALYSIS
Fair Value Measurements
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis.
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The accounting guidance for fair value measurements and
disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to
measure fair value.
The three levels of the fair value hierarchy under the accounting guidance for fair value measurements and disclosures
are described below:
• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets
or liabilities;
• Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; inputs other than quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or corroborated by observable market data for substantially the
full term of the assets or liabilities; and
• Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are
significant to the fair values.
We categorize assets and liabilities recorded or disclosed at fair value within the fair value hierarchy based on the
valuation processes used to derive their fair values and our judgment regarding the observability of the related inputs. Those
judgments are based on our knowledge and observations of the markets relevant to the individual assets and liabilities and
may vary based on current market conditions. In applying our judgments, we review ranges of third-party prices and
transaction volumes, and hold discussions with dealers and pricing service vendors to understand and assess the extent of
market benchmarks available and the judgments or modeling required in their processes. Based on these factors, we
determine whether the inputs are observable and whether the principal markets are active or inactive. For additional
information regarding our classification of assets, liabilities, and equity within the fair value hierarchy and the valuation
techniques used to measure fair value, see “NOTE 16: FAIR VALUE DISCLOSURES.”
The table below summarizes our assets and liabilities measured at fair value on a recurring basis on our consolidated
balance sheets at December 31, 2012 and 2011.
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