Freddie Mac 2012 Annual Report Download - page 225

Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method for
determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale and those securities where we elected the fair value option, we
classify the cash flows as investing activities because we hold these securities for investment purposes. In cases where the
transfer of available-for-sale securities represents a secured borrowing, we classify the related cash flows as financing
activities.
Repurchase and Resale Agreements and Dollar Roll Transactions
We enter into repurchase and resale agreements primarily as an investor or to finance certain of our security positions.
Such transactions are accounted for as secured financings because the transferor does not relinquish control over the
transferred assets.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently repurchase (or
purchase and subsequently resell) agency securities. When these transactions involve securities issued by consolidated
entities, they are treated as issuances and extinguishments of debt. When these transactions involve securities issued by
entities we do not consolidate, they are treated as purchases and sales as the security initially transferred is not required to be
the same or substantially the same as the security subsequently returned.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt. The debt securities of our consolidated trusts are prepayable without penalty at any
time. Other debt represents short-term and long-term debt securities that we issue to third parties to fund our general business
activities.
Both debt of our consolidated trusts and other debt, except for certain debt for which we elected the fair value option,
are reported at amortized cost. Deferred items, including premiums, discounts, and hedging-related basis adjustments are
reported as a component of total debt, net. Issuance costs are reported as a component of other assets. These items are
amortized and reported through interest expense using the effective interest method over the contractual life of the related
indebtedness. Amortization of premiums, discounts, and issuance costs begins at the time of debt issuance. Amortization of
hedging-related basis adjustments begins upon the discontinuation of the related hedge relationship.
We elected the fair value option on foreign-currency denominated debt and certain other debt securities. The change in
fair value for debt recorded at fair value is reported as gains (losses) on debt recorded at fair value in our consolidated
statements of comprehensive income. Upfront costs and fees on foreign-currency denominated debt and certain other debt
securities are recognized in earnings as incurred and not deferred. For additional information on our election of the fair value
option, see “NOTE 16: FAIR VALUE DISCLOSURES.”
When we purchase a PC or a REMIC and Other Structured Security that is a single-class security from a third party, we
extinguish the debt of the related PC trusts and recognize a gain or loss related to the difference between the amount paid to
redeem the debt security and its carrying value, adjusted for any related purchase commitments accounted for as derivatives,
in earnings as a component of gains (losses) on extinguishment of debt securities of consolidated trusts. Cash 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
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