AIG 2006 Annual Report Download - page 166

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
in AIGFP, and other payables. See Note 19 herein for a discussion
1. Summary of Significant Accounting Policies
of Derivatives. AIG has entered into certain insurance and
Continued
reinsurance contracts, primarily in its general insurance segment,
sales inducement assets amounted to $1.3 billion and $1.1 bil- that do not contain sufficient insurance risk to be accounted for
lion at December 31, 2006 and 2005, respectively. The amortiza- as insurance or reinsurance. Accordingly, these transactions are
tion expense associated with these assets is reported within recorded based upon deposit accounting, and the premiums
Incurred policy losses and benefits expense on the consolidated received, after deduction for certain related expenses, are
statement of income. Such amortization expense totaled recorded as deposits within Other liabilities on the consolidated
$135 million, $127 million and $104 million for the years ended balance sheet. Net proceeds of these deposits are invested and
December 31, 2006, 2005 and 2004, respectively. generate net investment income. As amounts are paid, consistent
See Note 19 herein for a discussion of derivatives. with the underlying contracts, the deposit liability is reduced.
(z) Reserve for Losses and Loss Expenses: Losses and loss (gg) Preferred Shareholders’ Equity in Subsidiary
expenses are charged to income as incurred. The reserve for Companies: Preferred shareholders’ equity in subsidiary compa-
losses and loss expenses represents the accumulation of esti- nies relates principally to outstanding preferred stock or interest
mates for unpaid reported losses and includes provisions for of ILFC, a wholly owned subsidiary of AIG. Cash distributions on
losses incurred but not reported. The methods of determining such preferred stock or interest are accounted for as interest
such estimates and establishing resulting reserves, including expense.
amounts relating to allowances for estimated unrecoverable
reinsurance, are reviewed and updated. If the estimate of (hh) Recent Accounting Standards:
reserves is determined to be inadequate or redundant, the Accounting Changes
increase or decrease is reflected in income. AIG discounts its loss
reserves relating to workers compensation business written by its FSP FAS 115-1, ‘‘The Meaning of Other-Than-Temporary Impair-
U.S. domiciled subsidiaries as permitted by the domiciliary ment and Its Application to Certain Investments,’’ replaces the
statutory regulatory authorities. measurement and recognition guidance set forth in EITF Issue
No. 03-1 and codifies certain existing guidance on impairment and
(aa) Future Policy Benefits for Life and Accident and accretion of income in periods subsequent to an other-than-
Health Contracts: The liabilities for future policy benefits and temporary impairment, where appropriate. AIG’s adoption of FSP
policyholders’ contract deposits are established using assump- FAS 115-1 on January 1, 2006 did not have a material effect on
tions described in Note 6 herein. AIG’s consolidated financial condition or results of operations.
(bb) Other Policyholders’ Funds: Other policyholders’ funds In December 2004, the FASB issued FAS 123, ‘‘Share-Based
are reported at cost and include any policyholders’ funds on Payment’’ (FAS 123R). FAS 123R and its related interpretive
deposit which encompasses premium deposits and similar items. guidance replaces FAS 123, ‘‘Accounting for Stock-Based Compen-
sation’’ (FAS 123), which superseded Accounting Principles Board
(cc) Financial Services — Securities and Spot Commodi- Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’
ties Sold but not yet Purchased, at market value: Securi- (APB 25) and amended FAS 95, ‘‘Statement of Cash Flows.’’
ties and spot commodities sold but not yet purchased represent FAS 123, as originally issued in 1995, established as preferable a
sales of securities and spot commodities not owned at the time fair-value-based method of accounting for share-based payment
of sale. The obligations arising from such transactions are transactions with employees. On January 1, 2003, AIG adopted
recorded on a trade-date basis and carried at fair value. Also the recognition provisions of FAS 123. See also Note 14 herein.
included are obligations under gold leases, which are accounted AIG adopted the provisions of the revised FAS 123R and its
for as a debt host with an embedded gold derivative. related interpretive guidance on January 1, 2006.
(dd) Short- and Long-Term Borrowings: AIG’s funding is For its service-based awards under the 1999 Stock Option
principally obtained from medium term and long-term borrowings Plan, 2002 Stock Incentive Plan and 1996 Employee Stock
and commercial paper. Commercial paper, when issued at a Purchase Plan, AIG recognizes compensation on a straight-line
discount, is recorded at the proceeds received and accreted to its basis over the scheduled vesting period. Unrecognized unvested
par value. Long-term borrowings are carried at the principal compensation expense for stock option awards granted under
amount borrowed, net of unamortized discounts or premiums. See APB 25 (i.e., before January 1, 2003) will be recognized from
Note 9 herein for additional information. January 1, 2006 to the vesting date. However, for the SICO Plans,
the AIG Deferred Compensation Profit Participant Plan (AIG
(ee) Liabilities Connected to Trust Preferred Stock: Liabili- DCPPP) and the AIG Partners Plan, which contain both perform-
ties connected to trust preferred stock principally relates to ance and service conditions, AIG recognizes compensation utiliz-
outstanding securities issued by American General Corporation ing a graded vesting expense attribution method. The effect of
(AGC), a wholly owned subsidiary of AIG. Cash distributions on this approach is to recognize compensation cost over the requisite
such preferred stock are accounted for as interest expense. service period for each separately vesting tranche of the award.
AIG’s share-based plans generally provide for accelerated
(ff) Other Liabilities: Other liabilities consist of other funds on
vesting after the participant turns 65 and retires. For awards
deposit, derivatives liabilities at fair value, other than derivatives
116 AIG 2006 Form 10-K