Freddie Mac 2015 Annual Report Download - page 303

Financial Statements Notes to the Consolidated Financial Statements | Note 14
Freddie Mac 2015 Form 10-K 301
NOTE 14: FAIR VALUE DISCLOSURES
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a
framework for measuring fair value, and sets forth disclosure requirements regarding fair value
measurements. This guidance applies whenever other accounting guidance requires or permits assets or
liabilities to be measured at fair value. Fair value represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the
liability takes place either in the principal market for the asset or liability, or, in the absence of a principal
market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic
remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
FAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value
hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of
the fair value hierarchy are defined as follows in priority order:
• Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical
assets or liabilities.
• Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices
in active markets for identical assets or liabilities.
• Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair
value measurement
We use quoted market prices and valuation techniques that seek to maximize the use of observable
inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the
assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are
classified in their entirety within the fair value hierarchy based on the lowest level input that is significant
to the fair value measurement.
VALUATION PROCESSES AND CONTROLS OVER FAIR VALUE MEASUREMENTS
We designed our control processes so that our fair value measurements are appropriate and reliable, that
they are based on observable inputs where possible, and that our valuation approaches are consistently
applied and the assumptions and inputs are reasonable. Our control processes provide a framework for
segregation of duties and oversight of our fair value methodologies, techniques, validation procedures,
and results.
Groups within our Finance division, independent of our business functions, execute and validate the
valuation processes and are responsible for determining the fair values of the majority of our financial
assets and liabilities. In determining fair value, we consider the credit risk of our counterparties in
estimating the fair values of our assets and our own credit risk in estimating the fair values of our
liabilities. The fair values determined by our Finance division are further verified by an independent group
within our Enterprise Risk Management (ERM) division.