Freddie Mac 2015 Annual Report Download - page 176

Management's Discussion and Analysis Critical Accounting Policies and Estimates
Freddie Mac 2015 Form 10-K 174
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make a number of
judgments, estimates, and assumptions that affect the reported amounts within our consolidated financial
statements. Certain of our accounting policies, as well as estimates we make, are critical, as they are
both important to the presentation of our financial condition and results of operations and require
management to make difficult, complex, or subjective judgments and estimates, often regarding matters
that are inherently uncertain. Actual results could differ from our estimates and the use of different
judgments and assumptions related to these policies and estimates could have a material impact on our
consolidated financial statements.
Our critical accounting policies and estimates relate to the single-family allowance for loan losses and fair
value measurements.
In the first quarter of 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines
for adverse classification and identification of specified single-family and multifamily assets and off-
balance sheet credit exposures, including guidelines for recognizing charge-offs on certain single-family
loans. Consequently, as of January 1, 2015, we changed when we deem a loan to be uncollectible, and
we began to charge-off the amount of recorded investment in excess of the fair value of the underlying
collateral for loans that have been deemed uncollectible prior to foreclosure. For additional information
about our critical accounting policies and estimates and other significant accounting policies, as well as
recently issued accounting guidance, see Note 1.
SINGLE-FAMILY ALLOWANCE FOR LOAN LOSSES
The single-family allowance for loan losses represents an estimate of probable incurred credit losses. The
single-family allowance for loan losses pertains to all single-family loans classified as held-for-investment
on our consolidated balance sheets.
Determining the appropriateness of the single-family allowance for loan losses is a complex process that
is subject to numerous estimates and assumptions requiring significant management judgment about
matters that involve a high degree of subjectivity. This process involves the use of models that require us
to make judgments about matters that are difficult to predict, the most significant of which are the
probability of default and loss severity. We regularly evaluate the underlying estimates and models we
use when determining the single-family allowance for loan losses and update our assumptions to reflect
our historical experience and current view of economic factors. See “Risk Factors - Operational Risks -
We face risks and uncertainties associated with the models that we use to inform business and risk
management decisions and for financial accounting and reporting purposes.”
We believe the level of our single-family allowance for loan losses is appropriate based on internal
reviews of the factors and methodologies used. No single statistic or measurement determines the
appropriateness of the allowance for loan losses. Changes in one or more of the estimates or
assumptions used to calculate the single-family allowance for loan losses could have a material impact on
the loan loss reserves and provision for credit losses.
Most single-family loans are aggregated into pools based on similar risk characteristics and measured