AIG 2006 Annual Report Download - page 167

American International Group, Inc. and Subsidiaries
not have a material effect on AIG’s consolidated financial
1. Summary of Significant Accounting Policies
condition or results of operations.
Continued
On February 16, 2006, the FASB issued FAS 155, ‘‘Accounting
granted after January 1, 2006, compensation expense is recog- for Certain Hybrid Financial Instruments’’ (FAS 155), an amend-
nized ratably from the date of grant through the shorter of age 65 ment of FAS 140 and FAS 133. FAS 155 allows AIG to include
or the vesting period. This change did not have a material effect changes in fair value in earnings on an instrument-by-instrument
on AIG’s consolidated financial position or results of operations. basis for any hybrid financial instrument that contains an
Awards granted prior to January 1, 2006 will continue to be embedded derivative that would otherwise be required to be
recognized over the vesting period with accelerated expense bifurcated and accounted for separately under FAS 133. The
recognition upon an actual retirement. Starr International Com- election to measure the hybrid instrument at fair value is
pany, Inc. (SICO) compensation expense for participants retiring irrevocable at the acquisition or issuance date.
after age 65 had been reflected in prior years’ results consistent AIG elected to early adopt FAS 155 as of January 1, 2006, and
with vested status under the SICO Plans. apply FAS 155 fair value measurement to certain structured note
At the June 2005 meeting, the FASB’s Emerging Issues Task liabilities and structured investments in AIG’s available for sale
Force (EITF) reached a consensus with respect to Issue No. 04-5, portfolio that existed at December 31, 2005. The effect of this
‘‘Determining Whether a General Partner, or the General Partners adoption resulted in an $11 million after-tax ($18 million pre-tax)
as a Group, Controls a Limited Partnership or Similar Entity When decrease to opening retained earnings as of January 1, 2006,
the Limited Partners Have Certain Rights’’ (EITF 04-5). EITF 04-5 representing the difference between the fair value of these hybrid
addresses what rights held by the limited partner(s) preclude financial instruments and the prior carrying value as of Decem-
consolidation in circumstances in which the sole general partner ber 31, 2005. The effect of adoption on after-tax gross gains and
would consolidate the limited partnership in accordance with losses was $218 million ($336 million pre-tax) and $229 million
generally accepted accounting principles absent the existence of ($354 million pre-tax), respectively.
the rights held by the limited partner(s). Based on that consen- In connection with AIG’s early adoption of FAS 155, structured
sus, the EITF 04-5 also agreed to amend the consensus in Issue note liabilities of $8.9 billion, other structured liabilities in
No. 96-16, ‘‘Investor’s Accounting for an Investee When the conjunction with equity derivative transactions of $111 million,
Investor Has a Majority of the Voting Interest but the Minority and hybrid financial instruments of $522 million at December 31,
Shareholders Have Certain Approval or Veto Rights.’’ The guidance 2006 are now carried at fair value. The effect on earnings for
in this Issue was effective after June 29, 2005 for general 2006, for changes in the fair value of hybrid financial instruments,
partners of all new limited partnerships formed and for existing was a pre-tax loss of $313 million, of which $287 million is
limited partnerships for which the partnership agreements are reflected in Other income and is largely offset by gains on
modified. For general partners in all other limited partnerships, economic hedge positions which are also reflected in operating
the guidance in this Issue was effective beginning January 1, income, and $26 million is reflected in Net investment income.
2006. The effect of the adoption of this EITF Issue was not In January 2007, the FASB issued Statement 133 Implementa-
material to AIG’s consolidated financial condition or results of tion Issue No. B40, ‘‘Embedded Derivatives: Application of Para-
operations. graph 13(b) to Securitized Interests in Prepayable Financial Assets’’
On June 29, 2005, the FASB issued Statement 133 Implemen- (Issue B40). Issue B40 provides guidance for when prepayment risk
tation Issue No. B38, ‘‘Embedded Derivatives: Evaluation of Net needs to be considered in determining whether mortgage-backed
Settlement with Respect to the Settlement of a Debt Instrument and other asset-backed securities contain an embedded derivative
through Exercise of an Embedded Put Option or Call Option.’’ This requiring bifurcation. Effective with AIG’s adoption of FAS 155
implementation guidance relates to the potential settlement of the beginning January 1, 2006, AIG has been treating derivatives
debtor’s obligation to the creditor that would occur upon exercise embedded in securitized interests in prepayable financial assets in
of the put option or call option, which meets the net settlement accordance with the guidance in Issue B40. Therefore, the adoption
criterion in FAS 133. The effective date of the implementation of this guidance did not have a material effect on AIG’s consoli-
guidance was January 1, 2006. The adoption of this guidance did dated financial condition or results of operations.
not have a material effect on AIG’s consolidated financial On March 27, 2006, the FASB issued FSP FTB 85-4-1,
condition or results of operations. ‘‘Accounting for Life Settlement Contracts by Third-Party Investors’’
On June 29, 2005, the FASB issued Statement 133 Implemen- (FSP 85-4-1), an amendment of FTB 85-4, ‘‘Accounting for
tation Issue No. B39, ‘‘Application of Paragraph 13(b) to Call Purchases of Life Insurance.’’ Life settlements are designed to
Options That Are Exercisable Only by the Debtor.’’ The conditions assist life insurance policyholders in monetizing the existing value
in FAS 133 paragraph 13(b) do not apply to an embedded call of life insurance policies. FSP 85-4-1 allows AIG to measure life
option in a hybrid instrument containing a debt host contract if the settlement contracts using either the investment method or fair
right to accelerate the settlement of the debt can be exercised value method. The election is made on an instrument-by-instrument
only by the debtor (issuer/borrower). This guidance does not apply basis and is irrevocable. AIG elected to early adopt FSP 85-4-1 as
to other embedded derivative features that may be present in the of January 1, 2006 using the investment method for pre-existing
same hybrid instrument. The effective date of the implementation investments held at December 31, 2005. The effect of this
guidance was January 1, 2006. The adoption of this guidance did adoption resulted in a $319 million after-tax ($487 million pre-tax)
Form 10-K 2006 AIG 117