AIG 2005 Annual Report Download - page 138

Notes to Consolidated Financial Statements Continued
involves the absorbing and/or receiving of variability indirectly
1. Summary of Significant Accounting Policies
from the entity (rather than directly). The identification of an
Continued
implicit variable interest is a matter of judgment that depends
In addition to hedging activities, AIG also uses derivative on the relevant facts and circumstances. The adoption of
instruments with respect to investment operations, which FSP FIN46R-5 did not have a material effect on AIG’s
include, among other things, credit default swaps, and purchas- financial condition or results of operations.
ing investments with embedded derivatives, such as equity In July 2003, the American Institute of Certified Public
linked notes and convertible bonds. All changes in the market Accountants issued Statement of Position 03-1, ‘‘Accounting
value of these derivatives are recorded in earnings. AIG and Reporting by Insurance Enterprises for Certain Nontradi-
bifurcates an embedded derivative where: (i) the economic tional Long-Duration Contracts and for Separate Accounts’’
characteristics of the embedded instruments are not clearly and (SOP 03-1). See also Note 21 herein.
closely related to those of the remaining components of the In December 2003, FASB issued Statement of Financial
financial instrument; (ii) the contract that embodies both the Accounting Standards No. 132 (Revised), ‘‘Employers’ Disclo-
embedded derivative instrument and the host contract is not sures About Pensions and Other Post Retirement Benefits,’’
remeasured at fair value; and (iii) a separate instrument with which revised disclosure requirements with respect to defined
the same terms as the embedded instrument meets the benefit plans. See also Note 15 herein.
definition of a derivative under Statement of Financial At the March 2004 meeting, the Emerging Issue Task Force
Accounting Standards No. 133, ‘‘Accounting for Derivative (EITF) reached a consensus with respect to Issue No. 03-1,
Instruments and Hedging Activities.’’ See also Note 20 herein. ‘‘The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.’’ On September 30, 2004,
(ff) Goodwill and Intangible Assets: Goodwill is reviewed for
the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1,
impairment on an annual basis, or more frequently if circum-
Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,
stances indicate that a possible impairment has occurred. The
‘‘The Meaning of Other-Than-Temporary Impairment and Its
assessment of impairment involves a two-step process whereby
Application to Certain Investments’’ delaying the effective
an initial assessment for potential impairment is performed,
date of this guidance until the FASB has resolved certain
followed by a measurement of the amount of impairment, if
implementation issues with respect to this guidance, but the
any. No impairment has been recorded by AIG in 2005, 2004
disclosures remain effective. This FSP, retitled FSP FAS 115-1,
or 2003.
‘‘The Meaning of Other-Than-Temporary Impairment and Its
On August 29, 2003, AIG acquired 100 percent of the
Application to Certain Investments,’’ replaces the measurement
outstanding common shares of GE Edison Life Insurance
and recognition guidance set forth in Issue No. 03-1 and
Company in Japan and the U.S.-based auto and home
codifies certain existing guidance on impairment. Adoption of
insurance business of General Electric Company (GE) for
FSP FAS 115-1 is not expected to have a material effect on
$2.1 billion. The acquisition expanded AIG’s life insurance
AIG’s financial condition or results of operations.
presence in Japan and AIG’s auto and home insurance
At the September 2004 meeting, the EITF reached a
presence in the U.S. At the date of acquisition, the fair values
consensus with respect to Issue No. 04-8, ‘‘Accounting Issues
of the assets acquired and liabilities assumed were $20 billion
Related to Certain Features of Contingently Convertible Debt
and $19 billion, respectively. Goodwill associated with this
and the Effect on Diluted Earnings per Share.’’ This Issue
transaction as of December 31, 2003 amounted to $1.3 billion,
addresses when the dilutive effect of contingently convertible
primarily related to the life business.
debt (Co-Cos) with a market price trigger should be included
Other changes in the carrying amount of goodwill are
in diluted earnings per share (EPS). The adoption of Issue
primarily caused as a result of foreign currency translation
No. 04-8 did not have a material effect on AIG’s diluted EPS.
adjustments and other purchase price adjustments.
In December 2004, the FASB issued Statement No. 123
(gg) Recent Accounting Standards: In December 2003, FASB (revised 2004), ‘‘Share-Based Payment’’ (FAS 123R).
issued Interpretation No. 46R, ‘‘Consolidation of Variable FAS 123R and its related interpretive guidance replaces
Interest Entities Revised’’ (FIN46R). See also Note 19 herein. FAS No. 123, ‘‘Accounting for Stock-Based Compensation’’
In March 2005, FASB issued FSP FIN46R-5 ‘‘Implicit (FAS 123), and supersedes Accounting Principles Board
Variable Interests under FASB Interpretation No. 46 (revised Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’
December 2003), Consolidation of Variable Interest Entities’’ (APB 25). FAS 123, as originally issued in 1995, established as
(FSP FIN46R-5) to address whether a reporting enterprise has preferable a fair-value-based method of accounting for share-
an implicit variable interest in a variable interest entity (VIE) based payment transactions with employees. On January 1,
or potential VIE when specific conditions exist. Although 2003, AIG adopted the recognition provisions of FAS 123. See
implicit variable interests are mentioned in FIN46R, the term also Note 14 herein. In April 2005, the SEC delayed the
is not defined and only one example is provided. effective date for FAS 123R until the first fiscal year beginning
FSP FIN46R-5 offers additional guidance, stating that implicit after June 15, 2005. As a result, AIG expects to adopt the
variable interests are implied financial interests in an entity provisions of the revised FAS 123R and its related interpretive
that change with changes in the fair value of the entity’s net guidance in the first quarter of 2006. For its service-based
assets exclusive of variable interests. An implicit variable awards (1999 Stock Option Plan, 2002 Stock Incentive Plan,
interest acts the same as an explicit variable interest except it and 1999 Employee Stock Purchase Plan), AIG recognizes
86 AIG m Form 10-K