AIG 2005 Annual Report Download - page 136

Notes to Consolidated Financial Statements Continued
in highly inflationary economies are recorded in income.
1. Summary of Significant Accounting Policies
Exchange gains and losses resulting from foreign currency
Continued
transactions are recorded in income currently. The exchange
business of AIG. The liabilities for these accounts are generally gain or loss with respect to utilization of qualifying foreign
equal to the account assets. exchange hedging activities is recorded as a component of
other comprehensive income. In the situation where the
(v) Financial Services – Securities and Spot Commodities Sold
qualifying hedge is identified to an underlying foreign currency
but not yet Purchased, at market value: Securities and spot
transaction, the hedging activity exchange or loss is transferred
commodities sold but not yet purchased represent sales of
out of other comprehensive income and netted against the
securities and spot commodities not owned at the time of sale.
exchange gain or loss of the underlying in income.
The obligations arising from such transactions are recorded on
a trade-date basis and carried at market values. (cc) Income Taxes: Deferred tax assets and liabilities are
recorded for the effects of temporary differences between the
(w) Liabilities Connected to Trust Preferred Stock: Liabilities
tax basis of an asset or liability and its reported amount in the
connected to trust preferred stock principally relates to
Consolidated Financial Statements. AIG assesses its ability to
outstanding securities issued by AGC, a wholly owned subsidi-
realize deferred tax assets primarily based on the earnings
ary of AIG. Cash distributions on such preferred stock are
history, the future earnings potential, the reversal of taxable
accounted for as interest expense.
temporary differences, and the tax planning strategies available
(x) Preferred Shareholders’ Equity in Subsidiary Companies: to the legal entities recognizing deferred tax assets, all through
Preferred shareholders’ equity in subsidiary companies relates which realization of deferred tax assets will be achieved, as
principally to outstanding preferred stock or interest of ILFC, a discussed in Statement of Financial Accounting Standards
wholly owned subsidiary of AIG. Cash distributions on such No. 109, ‘‘Accounting for Income Taxes.’’ See Note 3 herein
preferred stock or interest are accounted for as interest for further discussion of income taxes.
expense.
(dd) Earnings Per Share: Basic earnings per common share are
(y) Other Policyholders’ Funds: Other policyholders’ funds are based on the weighted average number of common shares
reported at cost and include any policyholders’ funds on outstanding, retroactively adjusted to reflect all stock dividends
deposit which encompasses premium deposits and similar items. and stock splits. Diluted earnings per share are based on those
shares used in basic earnings per share plus shares that would
(z) Other Liabilities: Other liabilities consist of other funds on have been outstanding assuming issuance of common shares for
deposits, derivatives liabilities at market value, and other all dilutive potential common shares outstanding, retroactively
payables. adjusted to reflect all stock dividends and stock splits.
(aa) Short- and Long-Term Borrowings: AIG’s funding is prin- The computation of earnings per share for December 31,
cipally obtained from medium-term and long-term borrowings. 2005, 2004 and 2003 was as follows:
Commercial paper, when issued at a discount, is recorded at
the proceeds received and accreted to its par value. Long-term Years Ended December 31,
borrowings are carried at the principal amount borrowed, net (in millions, except per share data) 2005 2004 2003
of unamortized discounts or premiums. See Note 9 herein for Numerator for basic earnings per
additional information. share:
Income before cumulative effect of
(bb) Translation of Foreign Currencies: Financial statement
accounting changes $10,477 $9,983 $8,099
accounts expressed in foreign currencies are translated into
Cumulative effect of accounting
U.S. dollars in accordance with Statement of Financial changes, net of tax –(144) 9
Accounting Standards No. 52, ‘‘Foreign Currency Translation’’
Net income applicable to common
(FAS 52). Under FAS 52, functional currency assets and
stock $10,477 $9,839 $8,108
liabilities are translated into U.S. dollars generally using
current rates of exchange prevailing at the balance sheet date Denominator for basic earnings per
share:
of each respective subsidiary and the related translation
Average shares outstanding used in
adjustments are recorded as a separate component of compre-
the computation of per share
hensive income, net of any related taxes, in consolidated
earnings:
shareholders’ equity. Functional currencies are generally the
Common stock issued 2,752 2,752 2,752
currencies of the local operating environment. Income state-
Common stock in treasury (155) (146) (142)
ment accounts expressed in functional currencies are translated
Average shares outstanding – basic 2,597 2,606 2,610
using average exchange rates. The adjustments resulting from
(continued)
translation of financial statements of foreign entities operating
84 AIG m Form 10-K