Travelers 2008 Annual Report Download - page 172

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of The Travelers Companies, Inc.
(together with its subsidiaries, the Company). The preparation of the consolidated financial statements
in conformity with U.S. generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and claims and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to the 2007 and 2006 financial
statements to conform to the 2008 presentation. All material intercompany transactions and balances
have been eliminated.
Adoption of New Accounting Standards
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, the FASB issued FASB Staff Position (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 non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).
The Company adopted FAS 157 and FSP FAS 157-2 effective January 1, 2008, and elected not to
apply the provisions of FAS 157 to goodwill and other intangible assets held by the Company and
measured annually for impairment testing purposes only. The adoption of FAS 157 and FSP FAS 157-2
did not have a material effect on the Company’s results of operations, financial position or liquidity.
The Company will adopt FAS 157 for non-financial assets and non-financial liabilities on January 1,
2009 and does not expect the provisions to have a material effect on its results of operations, financial
position or liquidity.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset
When the Market For That Asset Is Not Active (FSP FAS 157-3), with an immediate effective date,
including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends
FAS 157 to clarify the application of fair value in inactive markets and allows for the use of
management’s internal assumptions about future cash flows with appropriately risk-adjusted discount
rates when relevant observable market data does not exist. The objective of FAS 157 has not changed
and continues to be the determination of the price that would be received in an orderly transaction
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