2. Summary of Significant Accounting Policies General
These financial statements pertain to the financial position, results of operations, and cash flows of the DIF and are presented in conformity with U.S. generally accepted accounting principles (GAAP). These statements do not include reporting for assets and liabilities of closed banks and thrifts for which the FDIC acts as receiver or conservator. Periodic and final accountability reports of the FDIC’s activities as receiver or conservator are furnished to courts, supervisory authorities, and others as required.
Use of Estimates
Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent of such changes in estimates have been disclosed. The more significant estimates include the assessments receivable and associated revenue, the allowance for loss on receivables from resolutions, the estimated losses for anticipated failures, systemic risk and litigation, and the postretirement benefit obligation.
Cash equivalents are short-term, highly liquid investments consisting primarily of U.S. Treasury Overnight Certificates.
Investment in U.S. Treasury Obligations
DIF funds are required to be invested in obligations of the United States or in obligations guaranteed as to principal and interest by the United States; the Secretary of the U.S. Treasury must approve all such investments in excess of $100,000. The Secretary has granted approval to invest DIF funds only in U.S. Treasury obligations that are purchased or sold exclusively through the Bureau of the Public Debt’s Government Account Series (GAS) program.
DIF’s investments in U.S. Treasury obligations are classified as available-for-sale. Securities designated as available-for-sale are shown at market value, which approximates fair value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are included in the Statement of Income and Fund Balance as components of Net Income. Income on securities is calculated and recorded on a daily basis using the effective interest method.
Prior to 2008, DIF’s investments in U.S. Treasury obligations were classified as either held-to-maturity or available-for-sale based on the FDIC’s assessment of funding needs. Securities designated as held-to-maturity were shown at amortized cost. Amortized cost is the face value of securities plus the unamortized premium or less the unamortized discount. Amortizations were computed on a daily basis from the date of acquisition to the date of maturity, except for callable U.S. Treasury securities, which were amortized to the first call date.
See Note 3 for an explanation of the transfer of DIF’s held-to-maturity securities to the available-for-sale category.
Revenue Recognition for Assessments
The FDIC collects deposit insurance premiums from each insured depository institution at the end of the quarter following the period of insurance coverage. As a result, assessment revenue for the insured period is recognized based on an estimate. The estimate is derived from an institution’s risk-based assessment rate and assessment base for the prior quarter; adjusted for the current quarter’s available assessment credits, any changes in supervisory examination and debt issuer ratings for larger institutions, and a modest deposit insurance growth factor.
The estimated revenue amounts are adjusted when actual premiums are collected at quarter end. Total assessment income recognized for the year includes estimated revenue for the October-December assessment period. See Note 8 for additional information on assessments.
Capital Assets and Depreciation
The FDIC buildings are depreciated on a straight-line basis over a 35 to 50 year estimated life. Leasehold improvements are capitalized and depreciated over the lesser of the remaining life of the lease or the estimated useful life of the improvements, if determined to be material. Capital assets depreciated on a straight-line basis over a five-year estimated life include mainframe equipment; furniture, fixtures, and general equipment; and internal-use software. Personal computer equipment is depreciated on a straight-line basis over a three-year estimated life.
Disclosure about Recent Accounting Pronouncements
Effective as of January 1, 2008, DIF adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, on a prospective basis. The Statement defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on the inputs to valuation techniques used to measure fair value, and expands financial statement disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In measuring fair value, the Standard requires the use of fair value valuation techniques consistent with the market, income, and/or cost approach. The Statement establishes a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Assets and liabilities are classified within this hierarchy in their entirety based on the lowest level of any input that is significant to the fair value measurement. See Note 13 for specifics regarding fair value measurements.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. SFAS No. 159 creates a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities with changes in fair value recognized in earnings as they occur. The Statement requires entities to separately display the fair value of those assets and liabilities for which the entity has chosen to use fair value on the face of the balance sheet. As of December 31, 2008, the FDIC has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP.
The nature of related parties and a description of related party transactions are discussed in Note 1 and disclosed throughout the financial statements and footnotes.