AIG 2006 Annual Report Download - page 165

American International Group, Inc. and Subsidiaries
(x) Goodwill and Intangible Assets: Goodwill is the excess of
1. Summary of Significant Accounting Policies
cost over the fair value of net assets acquired. Goodwill is
Continued
reviewed for impairment on an annual basis, or more frequently if
securities available for sale that is credited or charged directly to circumstances indicate that a possible impairment has occurred.
other comprehensive income. DAC has been decreased by $720 The assessment of impairment involves a two-step process
million at December 31, 2006 and decreased by $1.14 billion at whereby an initial assessment for potential impairment is per-
December 31, 2005 for this adjustment. See also Note 4 herein. formed, followed by a measurement of the amount of impairment,
Value of Business Acquired (VOBA) is determined at the time if any. Impairment testing is performed using the fair value
of acquisition and is reported on the consolidated balance sheet approach, which requires the use of estimates and judgment, at
with DAC. This value is based on present value of future pre-tax the ‘‘reporting unit’’ level. A reporting unit is the operating
profits discounted at current yields applicable at time of purchase. segment, or a business that is one level below the operating
For products accounted under FAS 60, VOBA is amortized over the segment if discrete financial information is prepared and regularly
life of the business similar to that for DAC based on the reviewed by management at that level. The determination of a
assumptions at purchase. For FAS 97 products, VOBA is amor- reporting unit’s fair value is based on management’s best
tized in relation to the estimated gross profits to date for each estimate, which generally considers the unit’s market-based
period. As of December 31, 2006, there have been no impair- earning multiples of peer companies and expected future earn-
ments of VOBA. ings. If the carrying value of a reporting unit’s goodwill exceeds
(u) Investments in Partially Owned Companies: At Decem- its fair value, the excess is recognized as an impairment and
ber 31, 2006, AIG’s significant investments in partially owned recorded as a charge against net income. No impairment has
companies included its 19.4 percent interest in Allied World been recorded by AIG in 2006, 2005 or 2004. Changes in the
Assurance Holdings, Ltd., its 26 percent interest in Tata AIG Life carrying amount of goodwill result from foreign currency transla-
Insurance Company, Ltd., its 26 percent interest in Tata AIG tion adjustments and other purchase price adjustments.
General Insurance Company, Ltd. and its 24.5 percent interest in (y) Other Assets: Other assets consist of prepaid expenses,
The Fuji Fire and Marine Insurance Co., Ltd. This balance sheet including deferred advertising costs, sales inducement assets and
caption also includes investments in less significant partially derivatives assets at fair value, other than derivatives in AIGFP,
owned companies. The amounts of dividends received from and other deferred charges.
unconsolidated entities where AIG’s ownership interest is less Generally, advertising costs are expensed as incurred except
than 50 percent were $28 million, $146 million and $22 million in for certain direct response stand-alone cost pools, which are
2006, 2005 and 2004, respectively. The undistributed earnings of deferred over the expected future benefit period in accordance
unconsolidated entities where AIG’s ownership interest is less with Statement of Position 93-7, ‘‘Reporting on Advertising
than 50 percent were $300 million, $179 million and $445 mil- Costs.’’ In instances where AIG can demonstrate that its custom-
lion as of December 31, 2006, 2005 and 2004, respectively. ers have responded specifically to direct-response advertising,
(v) Real Estate and Other Fixed Assets: The costs of whose primary purpose is to elicit sales to customers and where
buildings and furniture and equipment are depreciated principally it can be shown that such advertising results in probable future
on a straight-line basis over their estimated useful lives (maximum economic benefits, the advertising costs are capitalized. Deferred
of 40 years for buildings and ten years for furniture and advertising costs are amortized on a cost-pool by cost-pool basis
equipment). Expenditures for maintenance and repairs are over the expected economic future benefit period and are reviewed
charged to income as incurred; expenditures for betterments are regularly for recoverability. Deferred advertising costs amounted to
capitalized and depreciated. $1.05 billion and $915 million at December 31, 2006 and 2005,
AIG periodically assesses the carrying value of its real estate respectively. The amount of expense amortized into earnings was
for purposes of determining any asset impairment. $359 million, $272 million and $244 million, for 2006, 2005,
Also included in Real Estate and Other Fixed Assets are and 2004, respectively.
capitalized software costs, which represent costs directly related AIG offers sales inducements, which include enhanced credit-
to obtaining, developing or upgrading internal use software. Such ing rates or bonus payments to contract holders (bonus interest)
costs are capitalized and amortized using the straight-line method on certain annuity and investment contract products. Sales
over a period generally not to exceed five years. inducements provided to the contractholder are recognized as part
of the liability for policyholders’ contract deposits on the consoli-
(w) Separate and Variable Accounts: Separate and variable dated balance sheet. Such amounts are deferred and amortized
accounts represent funds for which investment income and over the life of the contract using the same methodology and
investment gains and losses accrue directly to the policyholders assumptions used to amortize DAC. To qualify for such accounting
who predominantly bear the investment risk. Each account has treatment, the bonus interest must be explicitly identified in the
specific investment objectives, and the assets are carried at fair contract at inception, and AIG must demonstrate that such
value. The assets of each account are legally segregated and are amounts are incremental to amounts AIG credits on similar
not subject to claims which arise out of any other business of contracts without bonus interest, and are higher than the
AIG. The liabilities for these accounts are generally equal to the contract’s expected ongoing crediting rates for periods after the
account assets. bonus period. The deferred bonus interest and other deferred
Form 10-K 2006 AIG 115