Freddie Mac 2012 Annual Report Download - page 199

See “NOTE 7: INVESTMENTS IN SECURITIES — Table 7.2 — Available-For-Sale Securities in a Gross Unrealized
Loss Position” for the length of time our available-for-sale securities have been in an unrealized loss position. Also see
“NOTE 7: INVESTMENTS IN SECURITIES — Table 7.3 — Significant Modeled Attributes for Certain Non-Agency
Mortgage-Related Securities” for the modeled default rates and severities that were used to determine whether our senior
interests in certain non-agency mortgage-related securities would experience a cash shortfall. See “CONSOLIDATED
BALANCE SHEETS ANALYSIS — Investments in Securities” for more information on impairment recognition on
securities.
We believe our judgments and assumptions used in our evaluation of other-than-temporary impairment are reasonable.
However, different judgments or assumptions could have resulted in materially different recognition of other-than-temporary
impairment. It is possible that the losses we ultimately realize could be significantly higher or lower than the losses we have
recognized in our financial results to date.
Realizability of Deferred Tax Assets, Net
We use the asset and liability method to account for income taxes pursuant to the accounting guidance for income taxes.
Under this method, deferred tax assets and liabilities are recognized based upon the expected future tax consequences of
existing temporary differences between the financial reporting and the tax reporting basis of assets and liabilities using
enacted statutory tax rates. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not
that a tax benefit will not be realized. The realization of these net deferred tax assets is dependent upon the generation of
sufficient taxable income in available carryback years, from current operations and from unrecognized tax benefits, and upon
our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized losses.
On a quarterly basis, we determine whether a valuation allowance is necessary. In doing so, we consider all evidence
currently available, both positive and negative, in determining whether, based on the weight of that evidence, it is more likely
than not that the net deferred tax assets will be realized. Evidence that we consider includes, but is not limited to: (a) our
cumulative loss position for the past three years; (b) our current taxable loss position; (c) the amount and estimated time
required to realize our estimated cumulative tax net operating loss carryforward; (d) difficulty in predicting unsettled
circumstances related to the conservatorship; (e) our access to capital under the agreements associated with the
conservatorship; (f) management’s intent and ability to hold our available-for-sale securities until losses can be recovered;
and (g) the improving trend of our financial results.
The consideration of this evidence requires significant estimates, assumptions, and judgments, particularly about our
future financial condition and results of operations and our intent and ability to hold available-for-sale debt securities with
temporary unrealized losses until recovery. As discussed in “RISK FACTORS,” the conservatorship and related matters
fundamentally affecting our control, management, and operations are likely to affect our future financial condition and
results of operations. These events have resulted in a variety of uncertainties regarding our future operations, our business
objectives and strategies, and our future profitability, the impact of which cannot be reliably forecasted at this time. As such,
any changes in these estimates, assumptions or judgments may have a material effect on our financial position and results of
operations.
We determined that, as of September 30, 2008, it was more likely than not that we would not realize the portion of our
net deferred tax assets that is dependent upon the generation of future taxable income. This determination was driven by the
events and the resulting uncertainties as of that date. Those conditions continued to exist as of December 31, 2012. As a
result, we continue to maintain a valuation allowance against these net deferred tax assets at December 31, 2012. It is
possible that, in future periods, the uncertainties regarding our future operations and profitability could be resolved such that
it could become more likely than not that these net deferred tax assets would be realized due to the generation of sufficient
taxable income. If that were to occur, we would assess the need for a reduction of the valuation allowance, which could have
a material effect on our financial position and results of operations in the period of the reduction.
Also, we determined that a valuation allowance is not necessary for the portion of our net deferred tax assets that is
dependent upon our intent and ability to hold available-for-sale debt securities until the recovery of any temporary unrealized
losses. These temporary unrealized losses have only impacted AOCI, not income from continuing operations or our taxable
income, nor will they impact income from continuing operations or taxable income if they are held to maturity. As such, the
realization of this deferred tax asset is not dependent upon the generation of sufficient taxable income but rather on our intent
and ability to hold these securities until recovery of these unrealized losses, which may be at maturity. Our conclusion that
these unrealized losses are temporary and that we have the intent and ability to hold these securities until recovery requires
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