Freddie Mac 2015 Annual Report Download - page 288

Financial Statements Notes to the Consolidated Financial Statements | Note 12
Freddie Mac 2015 Form 10-K 286
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 the following
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 available-for-sale securities.
• Amortization related to premiums and discounts associated with PCs 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.
Segment Adjustments
In presenting Segment Earnings management and guarantee fee income and net interest income, we
make adjustments to better reflect how management measures and assesses the performance of each
segment and the company as a whole. These adjustments relate to amounts that are not reflected in net
income (loss) as determined in accordance with GAAP. These adjustments are reversed through the
segment adjustments line item within Segment Earnings, so that Segment Earnings (loss) for each
segment equals GAAP net income (loss) for each segment. The following segment adjustments are
necessary to reflect the effective yield realized on investments in consolidated Freddie Mac mortgage-
related securities purchased at a premium or discount or with buy-up fees:
• Adjustments to management and guarantee fee income for the Single-family Guarantee segment to
include the amortization of buy-down fees and credit delivery fees recorded in periods prior to the
January 1, 2010 adoption of accounting guidance for transfers of financial assets and the
consolidation of VIEs. As of December 31, 2015, the unamortized balance of buy-down fees was $0.2
billion and the unamortized balance of credit delivery fees was $0.5 billion. We consider such fees to
be part of the effective rate of the management and guarantee fee income on guaranteed loans.
These adjustments are necessary to better reflect the realization of revenue associated with
guarantee contracts over the life of the underlying loans.
• Adjustments to net interest income for the Investments segment to include the amortization of cash
premiums and discounts, as well as buy-up fees, on the consolidated Freddie Mac mortgage-related
securities we purchase as investments. As of December 31, 2015, the unamortized balance of such
premiums and discounts, net was $3.9 billion and the unamortized balance of buy-up fees was $0.3
billion.
Segment Allocations
The results of each reportable segment include directly attributable revenues and expenses.
Administrative expenses that are not directly attributable to a segment are allocated to our segments
using various methodologies, depending on the nature of the expense. Net interest income for each
segment includes allocated debt funding and hedging costs related to certain assets of each segment.
The Investments segment manages the funding and interest rate risk for all business segments. In
connection with this activity, the Investments segment transfers a cost to the other segments. The actual
costs may vary relative to these intra-company transfers. In addition, the financial statement volatility
associated with the use of derivatives to hedge certain assets outside the Investments segment is not
fully allocated to other segments. These allocations do not include the effects of dividends paid on our