Travelers 2005 Annual Report Download - page 153

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
141
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont inued)
Foreign Currency Translation
The Company assigns functional currencies to its foreign operations, which are generally the
currencies of the local operating environment. Foreign currency amounts are remeasured to the functional
currency, and the resulting foreign exchange gains or losses are reflected in the statement of income.
Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this
translation, net of tax, is recorded as a part of shareholders’ equity. The change in unrealized foreign
currency translation gain or loss during the year, net of tax, is a component of comprehensive income. Both
the remeasurement and translation are calculated using current exchange rates for the balance sheets and
average exchange rates for the statements of operations.
Stock-Based Compensation
The Company has an employee stock incentive compensation plan that includes stock-based awards of
stock options, restricted stock and deferred stock.
For stock-based employee awards granted, modified, or settled after December 31, 2002, the
Company applies the FAS 123 fair value method of accounting. Under this method, compensation cost is
measured at the grant date based on the fair value of the award and recognized ratably over the vesting
period. For restricted stock awards, the fair value is measured at the market price of a share on the grant
date while for stock option awards the fair value is derived by the application of an option pricing model at
date of grant.
For stock-based employee awards granted prior to January 1, 2003, the Company accounts for these
awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25
(APB 25), “Accounting for Stock Issued to Employees”, and related interpretations using the prospective
recognition transition alternative of FAS 148. For restricted stock awards, the market value on grant date
of these awards is recognized as compensation expense ratably over the vesting period. For stock option
awards, the awards are granted at an exercise price equal to the market value of the underlying common
stock on the date of the grant and accordingly there has been no employee compensation expense
recognized in earnings for the stock option awards. The accounting for the awards granted prior to
January 1, 2003 using APB 25 will cease upon adoption of FAS 123R January 1, 2006(see note 1,
Accounting Policies Not Yet Adopted - Share-Based Payment).
In connection with the merger in April 2004, the Company assumed 23 million outstanding SPC stock
options, of which 4 million remained unvested and assumed approximately 240,000 of outstanding SPC
restricted stock awards related to SPC equity-based compensation plans. These stock options and
restricted stock awards retained the same terms and conditions that were applicable prior to the merger.
At April 1, 2004, the estimated fair values of the unvested stock option awards and the restricted stock
awards were $35 million and $9 million, respectively, and were included in unearned compensation as a
separate component of equity. The unearned compensation expense is being recognized as a charge to
income over the remaining vesting period.