Freddie Mac 2012 Annual Report Download - page 227

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 so doing, 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. We determined that, as of
December 31, 2012 and 2011, 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 events and the resulting
uncertainties that existed as of December 31, 2012 and 2011. We will continue to evaluate our conclusion regarding the need
for a valuation allowance. 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 the deferred tax assets would be realized
and that a valuation allowance would no longer be necessary. For more information about the evidence that management
considers and our determination of the need for a valuation allowance, see “NOTE 12: INCOME TAXES.”
Income tax benefit (expense) includes: (a) deferred tax benefit (expense), which represents the net change in the
deferred tax asset or liability balance during the year plus any change in a valuation allowance; and (b) current tax benefit
(expense), which represents the amount of tax currently payable to or receivable from a tax authority including any related
interest and penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and penalties).
Income tax benefit (expense) excludes the tax effects related to adjustments recorded to equity, such as unrealized gains and
losses related to available-for-sale securities.
Regarding tax positions taken or expected to be taken (and any associated interest and penalties), we recognize a tax
position so long as it is more likely than not that it will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. See “NOTE 12: INCOME
TAXES” for additional information.
Earnings Per Common Share
In 2012, an amendment to the Purchase Agreement changed the manner in which the dividend on the senior preferred
stock is determined. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment
will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the
applicable capital reserve amount, exceeds zero. For each quarter beginning January 1, 2018, the dividend payment will be
the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero. The
dividend is presented in each period as a reduction to net income (loss) available to common stockholders and net income
(loss) per common share.
We have participating securities related to options and restricted stock units with dividend equivalent rights that receive
dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses.
These participating securities consist of: (a) vested and unvested options to purchase common stock; and (b) restricted stock
units that earn dividend equivalents at the same rate when and as declared on common stock. Consequently, in accordance
with accounting guidance, we use the “two-class” method of computing earnings per common share. The “two-class” method
is an earnings allocation formula that determines earnings per share for common stock and participating securities based on
dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding for the period. The weighted average common shares outstanding for the
period includes the weighted average number of shares that are associated with the warrant for our common stock issued to
Treasury pursuant to the Purchase Agreement. This warrant is included since it is unconditionally exercisable by the holder at
a minimal cost. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for further information.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares
outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the
following common equivalent shares outstanding: (a) the weighted average shares related to stock options if the average
market price during the period exceeds the exercise price; and (b) the weighted average of unvested restricted stock units.
During periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent
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