AIG 2011 Annual Report Download - page 230

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to
be accreted into net investment income over the securities’ remaining lives on a level-yield basis. Subsequently,
effective yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the
contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted
expected future cash flows arising due to reasons other than interest rate changes.
Trading securities include the investment portfolio of the Direct Investment book and the Maiden Lane
Interests. Trading securities for the Direct Investment book are held to meet short-term investment objectives and
to economically hedge other securities.
For discussion of AIG’s other-than-temporary impairment policy, see Note 7 herein.
Mortgage and other loans receivable – net: Mortgage and other loans receivable include commercial mortgages,
life insurance policy loans, commercial loans, other loans and notes receivable. Commercial mortgages,
commercial loans, and other loans and notes receivable are carried at unpaid principal balances less credit
allowances and plus or minus adjustments for the accretion or amortization of discount or premium. Interest
income on such loans is accrued as earned.
Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net
of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The
amount deferred is amortized to income as an adjustment to earnings using the interest method.
Mortgage and other loans receivable are considered impaired when collection of all amounts due under
contractual terms is not probable. Interest income on such impaired loans is recognized as cash is received. For a
discussion of the allowance for credit losses on mortgages and other loans receivable, see Note 8 herein.
Mortgage and other loans receivable also include life insurance policy loans, which are carried at unpaid
principal amount. There is no allowance for policy loans because these loans serve to reduce the death benefit
paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of
the policy.
Flight equipment primarily under operating leases – net: Flight equipment is stated at cost (adjusted for any
impairment charges), net of accumulated depreciation. Major additions, modifications and interest on deposits
during the construction phase are capitalized. Normal maintenance and repairs, airframe and engine overhauls
and compliance with return conditions of flight equipment on lease are generally provided by and paid for by the
lessee. Under the provisions of most leases for certain airframe and engine overhauls, the lessee is reimbursed for
certain costs incurred up to but not exceeding contingent rentals paid to ILFC by the lessee. ILFC recognizes
overhaul rentals received as revenue, net of estimated overhaul reimbursements. Any lessor maintenance
contribution made by ILFC in conjunction with a lease of a used aircraft and in excess of overhaul rentals
received from the lessee, is capitalized as lease incentives and amortized into lease revenue over the life of the
lease. Maintenance performed by ILFC in the event of a repossession of an aircraft is capitalized to the extent the
costs meet the recognition criteria for an asset. Depreciation of aircraft is generally computed on a straight-line
basis over a useful life of 25 years to a residual value of approximately 15 percent of the cost of the asset.
Aircraft in the fleet are evaluated for impairment annually during the third quarter and whenever events or
changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets
is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. These evaluations for impairment are significantly affected by estimates of future net cash
flows and other factors that involve uncertainty. There are a number of factors and circumstances that can
influence (and increase) the potential for recognizing an impairment loss. A firm commitment to sell aircraft may
result in aircraft being reclassified from held for use to held for sale for financial reporting purposes and would
require an impairment assessment based on the aircraft’s fair value. An increase in the likelihood of a sale
transaction being completed could result in a similar impairment assessment if the probability of an aircraft sale
216 AIG 2011 Form 10-K