Travelers 2004 Annual Report Download - page 134

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Business Combinations, Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted FASB Statements of Financial Accounting Standards No.
141, “Business Combinations” (FAS 141), and No. 142, Goodwill and Other Intangible Assets (FAS 142). These
standards changed the accounting for business combinations by, among other things, prohibiting the prospective
use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life created by business combinations accounted for using the purchase
method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life are subject
to an annual review for impairment. Other intangible assets that are not deemed to have an indefinite useful life
continue to be amortized over their useful lives.
During the quarter ended March 31, 2002, the Company performed the transitional impairment tests using
the fair value approach required by FAS 142. Based on these tests, the Company impaired $220 million after tax
of goodwill and $23 million after tax of indefinite-lived intangible assets representing the value of insurance
operating licenses, all attributable to The Northland Company and its subsidiaries (Northland), as a cumulative
effect adjustment as of January 1, 2002. The fair value of the Northland reporting unit was based on the use of a
multiple of earnings model. The fair value of Northland’s indefinite-lived intangible assets was based on the
present value of estimated net cash flows. Northland is a component of the Commercial operating segment.
Accounting Policies Not Yet Adopted
Share-Based Payment
In December 2004, the FASB issued Revised Statement of Financial Standards No. 123, Share-Based
Payment (FAS 123R), an amendment to FAS 123 and a replacement of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. FAS 123R requires public entities to
measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, and to recognize that cost over the requisite service period.
As of the required effective date, FAS 123R requires entities that use the fair-value method of either
recognition or disclosure under FAS 123, to apply a modified version of the prospective application. Under
modified prospective application, compensation cost is recognized on or after the required effective date for all
unvested awards, based on their grant-date fair value as calculated under FAS 123 for either recognition or pro
forma disclosure purposes. FAS 123R is effective July 1, 2005.
The Company adopted the fair value method of accounting under FAS 123 on January 1, 2003. The fair
value effect of stock options is derived by the application of an option pricing model. The impact of FAS 123R
will be the additional expense relating to unvested awards granted prior to January 1, 2003 and which remain
outstanding on the date of adoption of FAS 123R. The Company does not expect the impact of adopting FAS
123R to have a significant effect on operations, financial condition or liquidity.
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities are valued based
upon quoted market prices or dealer quotes, or if quoted market prices or dealer quotes are not available,
discounted expected cash flows using market rates commensurate with the credit quality and maturity of the
investment. Also included in fixed maturities are loan-backed and structured securities, which are amortized
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