Travelers 2007 Annual Report Download - page 163

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
which there is uncertainty about the timing of deductibility. The timing of such deductibility would not
affect the annual effective tax rate. The balance of unrecognized tax benefits at January 1, 2007 was
comprised of $63 million of unrecognized tax benefits that, if recognized, would reduce goodwill.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax
benefits in income taxes. The Company had approximately $35 million for the payment of interest
accrued at January 1, 2007.
In 2007, the Company effectively settled Internal Revenue Service (IRS) tax examinations for all
years through December 31, 2004. As a result, the Company recorded an after-tax benefit of
$86 million in its consolidated statement of income for the year ended December 31, 2007. In addition,
$63 million of previously unrecognized tax benefits related to the IRS settlement were recognized
through a reduction of goodwill during 2007.
The Company does not expect any significant changes to its liability for unrecognized tax benefits
during the next twelve months.
In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, Definition of Settlement in
FASB Interpretation No. 48 (FSP FIN 48-1). The FSP addresses whether it is appropriate for a company
to recognize a previously unrecognized tax benefit when the only factor that has changed, since
determining that a benefit should not be recognized, was the completion of an examination or audit by
a taxing authority. The FSP is effective January 1, 2007, the date of the Company’s initial adoption of
FIN 48. The adoption of FSP FIN 48-1 did not have a material effect on the Company’s results of
operations, financial position or liquidity. See note 10.
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and
140 (FAS 155). FAS 155 requires that beneficial interests in securitized financial assets be analyzed to
determine whether they are freestanding derivatives or hybrid instruments that contain an embedded
derivative requiring bifurcation and permits entities to fair value any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation.
FAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement
(new basis) event occurring after the beginning of an entity’s fiscal year that begins after September 15,
2006.
In January 2007, the FASB released Statement 133 Implementation Issue No. B40, Embedded
Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (B40).
B40 provides a limited scope exception from paragraph 13(b) of FAS 133 for securitized interests that
contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable
financial assets if certain criteria are met. B40 is effective upon the adoption of FAS 155 with certain
exceptions.
The Company adopted FAS 155 effective January 1, 2007 and did not elect the fair value option
for any existing contracts. There was no cumulative effect upon adoption of FAS 155.
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