Freddie Mac 2012 Annual Report Download - page 282

Segment Earnings
The financial performance of our Single-family Guarantee segment and Multifamily segment are measured based on
each segment’s contribution to GAAP net income (loss). Our Investments segment is measured on its contribution to GAAP
comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP
total other comprehensive income (loss), net of taxes.
The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise,
the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income
(loss). However, the accounting principles we apply to present certain financial statement line items in Segment Earnings for
our reportable segments, in particular Segment Earnings net interest income and management and guarantee income, differ
significantly from those applied in preparing the comparable line items in our consolidated financial statements prepared in
accordance with GAAP. Accordingly, the results of such line items differ significantly from, and should not be used as a
substitute for, the comparable line items as determined in accordance with GAAP. For reconciliations of the Segment
Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP,
see “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
Many of the reclassifications, adjustments and allocations described below relate to the amendments to the accounting
guidance for transfers of financial assets and consolidation of VIEs, which we adopted effective January 1, 2010. These
amendments require us to consolidate our single-family PC trusts and certain Other Guarantee Transactions, which makes it
difficult to view the results of the three operating segments from a GAAP perspective. For example, as a result of the
amendments, the net guarantee fee earned on mortgage loans held by our consolidated trusts is included in net interest
income on our GAAP consolidated statements of comprehensive income. Through the reclassifications described below, we
move the net guarantee fees earned on mortgage loans into Segment Earnings management and guarantee income.
Investment Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined
under GAAP related to our investment activities, including those described below. Through these reclassifications, we move
certain items into or out of net interest income so that, on a Segment Earnings basis, net interest income reflects how we
measure the effective yield earned on securities held in our mortgage investments portfolio and our cash and other
investments portfolio.
We use derivatives extensively in our investment activity. The reclassifications described below allow us to reflect, in
Segment Earnings net interest income, the costs associated with this use of derivatives.
• The accrual of periodic cash settlements of all derivatives is reclassified in Segment Earnings from derivative gains
(losses) into net interest income to fully reflect the periodic cost associated with the protection provided by these
contracts.
• Up-front cash paid or received upon the purchase or writing of swaptions and other option contracts is reclassified in
Segment Earnings prospectively on a straight-line basis from derivative gains (losses) into net interest income over
the contractual life of the instrument to fully reflect the periodic cost associated with the protection provided by these
contracts.
Amortization related to certain items is not relevant to how we measure the effective yield earned on the securities held
in our investments portfolios. Therefore, as described below, we reclassify these items in Segment Earnings from net interest
income to non-interest income.
• Amortization related to derivative commitment basis adjustments associated with mortgage-related and non-
mortgage-related securities.
• Amortization related to accretion of other-than-temporary impairments on non-mortgage-related securities held in our
cash and other investments portfolio.
• Amortization related to premiums and discounts associated with PCs and Other Guarantee Transactions issued by our
consolidated trusts that we previously held and subsequently transferred to third parties. The amortization is related to
deferred gains (losses) on transfers of these securities.
277 Freddie Mac