Travelers 2007 Annual Report Download - page 165

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Than Pensions (FAS 106). The provisions of FAS 87 and FAS 106 continue to apply in measuring plan
assets and benefit obligations, as of the date of the fiscal year-end statement of financial position, and
in determining the amount of net periodic benefit cost. The provisions of FAS 158 were effective for
fiscal years ending after December 15, 2006 and did not allow retrospective application. The Company’s
adoption of FAS 158 effective December 31, 2006 resulted in an $80 million reduction, net of tax, to
shareholders’ equity in 2006 and is recognized as an adjustment to the ending balance of accumulated
other changes in equity from nonowner sources. The adoption of FAS 158 did not affect the Company’s
results of operations or liquidity as FAS 158 does not affect the determination of net periodic pension
cost. See note 12.
Accounting Standards Not Yet Adopted
Fair Value Measurements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. It applies to other pronouncements that
require or permit fair value but does not require any new fair value measurements. The statement
defines fair value as ‘‘the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.’’
FAS 157 establishes a fair value hierarchy to increase consistency and comparability in fair value
measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the
highest priority to quoted prices in active markets. The highest possible level should be used to
measure fair value. FAS 157 is effective for fiscal years beginning after November 15, 2007.
In February 2008, FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
FAS 157-2), which permits a one-year deferral of the application of FASB Statement No. 157, Fair
Value Measurements, for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
The Company will adopt FAS 157 and FSP FAS 157-2 effective January 1, 2008. Accordingly, the
provisions of FAS 157 will not be applied to goodwill and other intangible assets held by the Company
and measured annually for impairment testing purposes only. The adoption of FAS 157, for all other
assets and liabilities held by the Company, is not expected to have a material effect on the Company’s
results of operations, financial position or liquidity.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits an entity to
irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement
attribute for many financial assets and liabilities and certain other items including property and casualty
insurance contracts. Entities electing the fair value option would be required to recognize changes in
fair value in earnings and to expense up-front costs and fees associated with the item for which the fair
value option is elected. Entities electing the fair value option are required to distinguish on the face of
the statement of financial position the fair value of assets and liabilities for which the fair value option
has been elected, and similar assets and liabilities measured using another measurement attribute. An
153