AIG 2006 Annual Report Download - page 161

American International Group, Inc. and Subsidiaries
(Unrealized gains and losses from trading securities, commodi-
1. Summary of Significant Accounting Policies
ties sold, but not yet purchased, futures and hybrid financial
Continued
instruments.
Realized Capital Gains (Losses): Realized capital gains and losses (Realized gains and losses from the sale of available for sale
are determined principally by specific identification. The realized securities and investments in private equities, joint ventures
capital gains and losses are generated primarily from the following and limited partnerships.
sources (in AIG’s insurance operations and Other category): (Exchange gains and losses resulting from foreign currency
(Sales of fixed maturity securities, equity securities, real estate, transactions.
investments in joint ventures and limited partnerships and (Reductions to the cost basis of equity securities for other-than-
other types of investments. temporary impairments.
(Reductions to the cost basis of fixed maturities, equity (Earnings from hedge funds and limited partnership investments
securities and other invested assets for other-than-temporary accounted for under the equity method.
impairments. Incurred policy losses and benefits: Incurred policy losses for
(Changes in fair value of derivatives used for other than hedging short duration insurance contracts consist of the estimated
activities. ultimate cost of settling claims incurred within the reporting
(Exchange gains and losses resulting from foreign currency period, including incurred but not reported claims, plus the
transactions. changes in estimates of current and prior period losses resulting
Other Income: Other income includes income from flight equip- from the continuous review process. Benefits for long duration
ment, finance charges on consumer loans and income generated insurance contracts consist of benefits paid and changes in future
from asset management activities and from the operations of policy benefits liabilities. Benefits for universal life and investment-
AIGFP. type products primarily consists of interest credited to policy
Income from flight equipment under operating leases is account balances and benefit payments made in excess of policy
recognized over the life of the lease as rentals become receivable account balances.
under the provisions of the lease or, in the case of leases with (b) Foreign Currency: Financial statement accounts expressed
varying payments, under the straight-line method over the noncan- in foreign currencies are translated into U.S. dollars in accordance
celable term of the lease. In certain cases, leases provide for with Statement of Financial Accounting Standards (FAS) 52,
additional payments contingent on usage. Rental income is ‘‘Foreign Currency Translation’’ (FAS 52). Under FAS 52, functional
recognized at the time such usage occurs less a provision for currency assets and liabilities are translated into U.S. dollars
future contractual aircraft maintenance. Gains and losses on flight generally using current rates of exchange prevailing at the balance
equipment are recognized when flight equipment is sold and the sheet date of each respective subsidiary and the related transla-
risk of ownership of the equipment is passed to the new owner. tion adjustments are recorded as a separate component of other
Finance charges on consumer loans are recognized as revenue comprehensive income, net of any related taxes, in consolidated
using the interest method. Revenue ceases to be accrued when shareholders’ equity. Functional currencies are generally the
contractual payments are not received for four consecutive currencies of the local operating environment. Income statement
months for loans and retail sales contracts, and for six months for accounts expressed in functional currencies are translated using
revolving retail accounts and private label receivables. Extension average exchange rates. The adjustments resulting from transla-
fees, late charges, and prepayment penalties are recognized as tion of financial statements of foreign entities operating in highly
revenue when received. inflationary economies are recorded in income. Exchange gains
Income generated with respect to asset management opera- and losses resulting from foreign currency transactions are
tions is generally recognized as revenues as services are recorded in income currently.
performed. Certain costs incurred in the sale of mutual funds are
deferred and subsequently amortized. (c) Income Taxes: Deferred tax assets and liabilities are
Income generated from the operations of AIGFP includes the recorded for the effects of temporary differences between the tax
following: basis of an asset or liability and its reported amount in the
(Accrued interest income and expense, as well as amortization consolidated financial statements. AIG assesses its ability to
and accretion of premiums and discounts on bonds. realize deferred tax assets primarily based on the earnings
(Dividend income and distributions from common and preferred history, future earnings potential, the reversal of taxable tempo-
stock and other investments when receivable. rary differences, and the tax planning strategies available to the
(Changes in the fair value of derivatives. In certain instances, legal entities recognizing deferred tax assets, in accordance with
no initial gain or loss is recognized in accordance with FAS 109, ‘‘Accounting for Income Taxes.’’ See Note 3 herein for a
Emerging Issues Task Force Issue No. 02-3, ‘‘Issues Involved further discussion of income taxes.
in Accounting for Derivative Contracts held for Trading Purposes (d) Contingencies: Amounts are accrued for the financial
and Contracts Involved in Energy Trading and Risk Management resolution of claims that have either been asserted or are
Activities’’ (EITF 02-3). The initial gain or loss is recognized deemed probable of assertion if, in the opinion of management, it
over the life of the transactions and as observable market data is both probable that a liability has been incurred and the amount
becomes available.
Form 10-K 2006 AIG 111