Freddie Mac 2012 Annual Report Download - page 215

We recorded the cumulative effect of the correction of certain miscellaneous errors related to previously reported
periods in the year ended December 31, 2012. We concluded that these errors are not material individually or in the
aggregate to our previously issued consolidated financial statements for any of the periods affected, or to our earnings for the
full year ended December 31, 2012, or to the trend of earnings. The impact to earnings, net of taxes, of the errors corrected
during the year ended December 31, 2012 was $0.6 billion. The most significant corrections relate to: (a) classification of
loans discharged in Chapter 7 bankruptcy; and (b) consolidation of certain REMIC trusts, and are described further below.
As of September 30, 2012, we classified loans discharged in Chapter 7 bankruptcy as TDRs. Prior to the third quarter of
2012, these loans were not classified as TDRs (unless they were already classified as such for other reasons) and we
measured those loans collectively for impairment. As a result, loans representing $19.5 billion in UPB as of September 30,
2012 were newly classified as TDRs and have been individually measured for impairment regardless of the loan’s payment
status. The cumulative effect of correcting this error on our loan loss reserves was an increase of $0.3 billion, reflecting the
additional provision for credit losses recorded in 2012 related to these loans. See “NOTE 5: INDIVIDUALLY IMPAIRED
AND NONPERFORMING LOANS” for additional information on loans where the borrowers’ debts have been discharged in
Chapter 7 bankruptcy.
During the third quarter of 2012, we corrected an error associated with the consolidation of certain of our REMIC trusts
for which we held substantially all of the beneficial interests issued by the trusts, but did not consolidate the trusts in prior
periods. We consolidated these trusts during the third quarter of 2012 by derecognizing our investments in these entities,
which totaled $4.4 billion, and recognizing the assets and liabilities of the consolidated entities at their fair values. This
correction also reduced other income by $0.1 billion during the third quarter of 2012.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and
(b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has made
significant estimates in preparing the financial statements, including, but not limited to, establishing the allowance for loan
losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, assessing impairments
on investments, and assessing the realizability of net deferred tax assets. Actual results could be different from these
estimates.
Change in Estimate
Other-Than-Temporary Impairments of Single-Family Non-Agency Mortgage-Related Securities
During the fourth quarter of 2012, we enhanced our approach to estimating other-than-temporary-impairments of our
single-family non-agency mortgage-related securities by implementing a third-party model, which increases the level of
disaggregation for certain assumptions used in projecting cash flow estimates for these securities. We estimate that, as of the
beginning of the fourth quarter of 2012, these enhancements would have increased net impairment of available-for-sale
securities recognized in earnings and therefore decreased net income by $1.3 billion. See “NOTE 7: INVESTMENTS IN
SECURITIES” for more information.
Single-Family Loan Loss Reserve Severity
During the second quarter of 2012, we updated our method of estimating loss severity rates for single-family loan loss
reserves to change from the most recent three months of sales experience on our distressed property dispositions to the most
recent six months of sales experience on our distressed property dispositions. This change did not have a material impact on
our consolidated financial statements.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. The net earnings attributable to
the noncontrolling interests in our consolidated subsidiaries are reported separately in the consolidated statements of
comprehensive income as comprehensive (income) loss attributable to noncontrolling interest. All intercompany transactions
have been eliminated in consolidation.
For each entity with which we are involved, we determine whether the entity should be consolidated in our financial
statements. We consolidate entities in which we have a controlling financial interest. The method for determining whether a
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