MetLife 2006 Annual Report Download - page 102

The adoption of SFAS 158 resulted in a reduction of $744 million, net of income tax, to accumulated other comprehensive income,
which is included as a component of total consolidated stockholders’ equity. As the Company’s measurement date for its pension and
other postretirement benefit plans is already December 31 there is no impact of adoption due to changes in measurement date. See also
Summary of “Significant Accounting Policies and Critical Accounting Estimates” and Note 16.
Stock Compensation Plans
As described previously, effective January 1, 2006, the Company adopted SFAS 123(r) including supplemental application guidance
issued by the SEC in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB 107”) — using the modified prospective
transition method. In accordance with the modified prospective transition method, results for prior periods have not been restated.
SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a
grantee is required to provide goods or services in exchange for the award. The Company had previously adopted the fair value method of
accounting for stock-based awards as prescribed by SFAS 123 on a prospective basis effective January 1, 2003, and prior to January 1,
2003, accounted for its stock-based awards to employees under the intrinsic value method prescribed by APB 25. The Company did not
modify the substantive terms of any existing awards prior to adoption of SFAS 123(r).
Under the modified prospective transition method, compensation expense recognized during the year ended December 31, 2006
includes: (a) compensation expense for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based
awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(r).
The adoption of SFAS 123(r) did not have a significant impact on the Company’s financial position or results of operations as all stock-
based awards accounted for under the intrinsic value method prescribed by APB 25 had vested prior to the adoption date and the
Company had adopted the fair value recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148, and carried
forward in the provisions of SFAS 123(r), the Company discloses the pro forma impact as if stock-based awards accounted for under
APB 25 had been accounted for under the fair value method in Note 17.
SFAS 123 allowed forfeitures of stock-based awards to be recognized as a reduction of compensation expense in the period in which
the forfeiture occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now incorporates an estimate of future
forfeitures into the determination of compensation expense when recognizing expense over the requisite service period. The impact of this
change in accounting policy was not significant to the Company’s consolidated financial position or results of operations for the year ended
December 31, 2006.
Additionally, for awards granted after adoption, the Company changed its policy from recognizing expense for stock-based awards over
the requisite service period to recognizing such expense over the shorter of the requisite service period or the period to attainment of
retirement-eligibility. The pro forma impact of this change in expense recognition policy for stock-based compensation is detailed in
Note 17.
Prior to the adoption of SFAS 123(r), the Company presented tax benefits of deductions resulting from the exercise of stock options
within operating cash flows in the consolidated statements of cash flows. SFAS 123(r) requires tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options be classified and reported as a financing cash inflow upon adoption of
SFAS 123(r).
Derivative Financial Instruments
The Company has adopted guidance relating to derivative financial instruments as follows:
kEffective January 1, 2006, the Company adopted prospectively SFAS No. 155, Accounting for Certain Hybrid Instruments
(“SFAS 155”). SFAS 155 amends SFAS 133 and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (“SFAS 140”). SFAS 155 allows financial instruments that have embedded derivatives to be accounted
for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on
a fair value basis. In addition, among other changes, SFAS 155:
(i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133;
(ii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
(iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
(iv) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity (“QSPE”) from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial interest.
The adoption of SFAS 155 did not have a material impact on the Company’s consolidated financial statements.
kEffective October 1, 2006, the Company adopted SFAS 133 Implementation Issue No. B40, Embedded Derivatives: Application of
Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (“Issue B40”). Issue B40 clarifies that a securitized interest in
prepayable financial assets is not subject to the conditions in paragraph 13(b) of SFAS 133, if it meets both of the following criteria:
(i) the right to accelerate the settlement if the securitized interest cannot be controlled by the investor; and (ii) the securitized interest
itself does not contain an embedded derivative (including an interest rate-related derivative) for which bifurcation would be required
other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. The adoption
of Issue B40 did not have a material impact on the Company’s consolidated financial statements.
kEffective January 1, 2006, the Company adopted prospectively SFAS 133 Implementation Issue No. B38, Embedded Derivatives:
Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call
Option (“Issue B38”) and SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call
Options That Are Exercisable Only by the Debtor (“Issue B39”). Issue B38 clarifies that the potential settlement of a debtor’s obligation
to a creditor occurring upon exercise of a put or call option meets the net settlement criteria of SFAS 133. Issue B39 clarifies that an
F-19MetLife, Inc.
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)