| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Summary of Significant Accounting Policies Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We are regulated by FHFA, the SEC, HUD, and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see Note 2. Throughout our consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the Glossary. Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated. We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the authority provided by FHFA to our Board of Directors to oversee management's conduct of our business operations. We have reclassified certain amounts in our prior periods' consolidated financial statements to conform to the current presentation as follows: | | n | Credit enhancement expense, which represents expenses incurred from freestanding credit enhancements, has been presented as a separate line item within non-interest expense, as the volume of freestanding credit enhancements has increased and become a more significant driver of our results of operations. In prior periods, freestanding credit enhancement expenses were recorded in other expenses; |
| | n | Mortgage loans gains (losses), investment securities gains (losses), debt gains (losses), and derivative gains (losses) have been aggregated and presented as a single amount, investment gains (losses), net, to more clearly show the net effect of these activities on our results of operations, as certain gains and losses on our assets and debt are generally offset by certain gains and losses on the derivatives we use to hedge them. In prior periods, these amounts were shown separately as individual line items, and we continue to present the detail of each individual line item in Note 18; and |
| | n | Certain other immaterial amounts have been reclassified between other income and guarantee fee income and other income and investment gains (losses), net to better align these amounts with the business drivers of the activity. |
These reclassifications did not have a material impact on our financial condition or results of operations. We evaluate the materiality of identified errors in the financial statements using both an income statement, or "rollover," and a balance sheet, or "iron curtain," approach, based on relevant quantitative and qualitative factors. The financial statements include certain adjustments to correct immaterial errors related to previously reported periods. Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, and losses during the reporting period. Management has made significant estimates in preparing the financial statements for establishing the allowance for credit losses and valuing financial instruments and other assets and liabilities. Actual results could be different from these estimates. Consolidation and Equity Method Accounting
For each entity with which we are involved, we determine whether the entity should be consolidated in our financial statements. We generally consolidate entities in which we have a controlling financial interest. The method for determining whether a controlling financial interest exists varies depending on whether the entity is a VIE. For entities that are not VIEs, we hold a controlling financial interest in entities where we hold a majority of the voting rights or a majority of a limited partnership's kick-out rights through voting interests. We do not currently consolidate any entities which are not VIEs. We use the equity method to account for our interests in entities in which we do not have a controlling financial interest, but over which we have significant influence. Cash and Cash Equivalents
Highly liquid investment securities that have an original maturity of three months or less are accounted for as cash equivalents. Original maturity means the original maturity to us when we acquire the investment, not the original maturity of the instrument itself. Cash collateral accepted from counterparties that we do not have the right to use for general corporate purposes is classified as restricted cash and cash equivalents on our consolidated balance sheets. Restricted cash and cash equivalents include cash remittances received from servicers of the underlying assets of our consolidated trusts which are deposited into a separate custodial account. We invest the cash held in the custodial account in short-term investments and are entitled to the interest income earned on these short-term investments, which is recorded as interest income, other on our consolidated statements of comprehensive income. Comprehensive Income
Comprehensive income includes all changes in equity during a period, except those resulting from investments by stockholders. We define comprehensive income as consisting of net income (loss) plus after-tax changes in: n Unrealized gains and losses on available-for-sale securities; n Unrealized gains and losses related to cash flow hedge relationships; and n Defined benefit plans. Other Significant Accounting Policies
The table below identifies our other significant accounting policies and the related note in which information about them can be found. | | | Note | Accounting Policy | | Variable Interest Entities | Note 4 | Mortgage Loans and Allowance for Loan Losses | Note 5 | Financial Guarantees | Note 6 | Credit Enhancements | Note 7 | Investments in Securities | Note 8 | Debt | Note 9 | Derivatives | Note 10 | Collateralized Agreements and Offsetting Arrangements | Note 10 | Repurchase and Resale Agreements | Note 11 | Stockholders' Equity | Note 11 | Earnings Per Share | Note 12 | Income Taxes | Note 13 | Segment Reporting | Note 15 | Fair Value Measurements |
Recently Issued Accounting Guidance
| | | | | Recently Adopted Accounting Guidance | Standard | Description | Date of Adoption | Effect on Consolidated Financial Statements | ASU 2016-02, Leases (Topic 842) | The amendment in this Update addresses the accounting for lease arrangements. | January 1, 2019 | The adoption of the amendment did not have a material effect on our consolidated financial statements or on our disclosures.
| ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purpose | The amendments in this Update permit the OIS rate based on SOFR, as an eligible U.S. benchmark interest rate for purposes of applying hedge accounting under Topic 815. | January 1, 2019 | The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.
| ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors | The amendments in this Update address certain ASU 2016-02 implementation issues including the recognition of taxes collected from lessees, lessor costs paid directly by a lessee, and recognition of variable payments for contracts with lease and non-lease components. | January 1, 2019 | The adoption of the amendments did not have a material effect on our consolidated financial statements or on our disclosures.
|
| | | | | Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements | Standard | Description | Date of Planned Adoption | Effect on Consolidated Financial Statements | ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. | January 1, 2020 | We have developed our models to estimate lifetime expected credit losses on our financial instruments measured at amortized cost primarily using a discounted cash flow methodology. We used these models to execute our process for estimating the allowance for credit losses under the new standard in parallel with our existing process for estimating the allowance for credit losses based on incurred losses and have developed an appropriate governance process for our estimate of expected credit losses under the new standard. The amendments will be applied through a cumulative effect adjustment to retained earnings as of January 1, 2020.
Based on the composition of our portfolio as of January 1, 2020 and the economic conditions and forecasts at that time, we expect the transition impact to result in a decrease in retained earnings of $0.2 billion. The increase in the allowance for credit losses from incorporating lifetime losses is generally offset by recoveries and a positive impact from including forecasts of economic conditions. |
| | | | | Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements | Standard | Description | Date of Planned Adoption | Effect on Consolidated Financial Statements | ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurements, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. Certain disclosure requirements were either removed, modified, or added.
| January 1, 2020 | On October 1, 2018, we early adopted the amendments to remove or modify certain disclosures, which did not have a material effect on our consolidated financial statements. We are delaying adoption of the amendments to add certain disclosures until their effective date. We do not expect that the adoption of the additional disclosures will have a material effect on our consolidated financial statements. | ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). | January 1, 2020 | We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements. | ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities | The amendments in this Update require that indirect interests held through related parties under common control be considered on a proportional basis when determining whether fees paid to decision makers or service providers are variable interests. These amendments align with the determination of whether a reporting entity within a related party group is the primary beneficiary of a VIE. | January 1, 2020 | We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.
| ASU 2019-01, Leases (Topic 842): Narrow-Scope Improvements for Lessors | The amendments in this Update provide guidance for the: (1) lessor's fair value determination of the lease's underlying asset; (2) lessor's statement of cash flows presentation of cash received from sales-type and direct financing leases; and (3) removal of interim transition disclosure requirements related to changes in accounting principles. | January 1, 2020 | We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements. | ASU 2019-04, Codification Improvements to Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825 | The amendments in this Update clarify certain aspects of Topic 326 guidance issued in ASU 2016-13 including the scope of the credit losses standard and issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments. The other amendments in this update clarify certain aspects of Topic 815 and Topic 825. | January 1, 2020 | The impact of adopting the Topic 326 amendments is included with the impact of adoption of ASU 2016-13. We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements. | ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument | The amendments in this Update provide entities with transition relief upon the adoption of ASU 2016-13 by providing an option to elect the fair value option on certain financial instruments measured at amortized cost. | January 1, 2020 | We do not expect to elect the fair value option for any financial instruments upon adoption of ASU 2016-13. | ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326) | The amendments in this Update clarify certain aspects of Topic 326 guidance issued in ASU 2016-13 including guidance providing transition relief for TDRs. | January 1, 2020 | The impact of adopting these amendments is included with the impact of adoption of ASU 2016-13. | ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | The amendments in this Update simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and add guidance to reduce the complexity of applying Topic 740. | January 1, 2021 | We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements. |
|