Fannie Mae reported record earnings on Tuesday despite it choosing not to recognize an iota of its nearly $60 billion deferred tax asset (DTA) as net income, spurring investor speculation pertaining to its shadow foreclosure inventory.
Fannie Mae reportedly earned $17.2 billion in 2012 with $7.6 billion during the fourth quarter of 2012. Ironically, this represents the largest quarterly and annual profits in the entity’s torrid history. Strong earnings had already been widely expected, since Fannie Mae announced last month that it had delayed its earnings release in order to evaluate whether to release any of its deferred tax asset figures.
Critics are clamoring as to which figures to believe and this latest report has ignited more controversy for the quasi federal entity.
The subject deferred tax asset reflects potential tax credits from past losses. However, unless a company surmises that it has a stronger than 50% chance of realizing enough earnings to make use of the loss, it is required to take what is referred to in accounting terms as a valuation allowance, which means the DTA can’t be reflected as income for accounting purposes. Because all of Fannie’s profits are routed to the Treasury until the company has repaid its debts to the government, capturing a tax credit effectively means taking money from one part of the Treasury (the IRS) to pay another.
In a press release accompanying the earnings, Fannie Mae stated , “In evaluating the recoverability of Fannie Mae’s deferred tax assets, as of December 31, 2012, the company again determined that the factors in favor of maintaining the allowance outweighed the factors in favor of releasing it.”
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