AIG 2007 Annual Report Download - page 192

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Certain Nontraditional Long-Duration Contracts and for Separate
1. Summary of Significant Accounting Policies
Accounts’’ (SOP 03-1) should have been reported as general
Basis of Presentation account assets. Accordingly, the December 31, 2006 consolidated
balance sheet has been revised to reflect the transfer of $2.4 bil-
The consolidated financial statements include the accounts of
lion of assets from separate account assets to general account
AIG, its controlled subsidiaries, and variable interest entities in
assets, and the same amount of liabilities from separate account
which AIG is the primary beneficiary. Entities that AIG does not
liabilities to policyholders’ contract deposits. This revision had no
consolidate but in which it holds 20 percent to 50 percent of the
effect on consolidated income before income taxes, net income, or
voting rights and/or has the ability to exercise significant influence
shareholders’ equity for any period presented.
are accounted for under the equity method.
Certain reclassifications and format changes have been made
Certain of AIG’s foreign subsidiaries included in the consolidated
to prior period amounts to conform to the current period
financial statements report on a fiscal year ending November 30.
presentation.
The effect on AIG’s consolidated financial condition and results of
operations of all material events occurring between November 30 Out-of-Period Adjustments
and December 31 for all periods presented has been recorded.
During 2007 and 2006, AIG recorded the effects of certain out-of-
The accompanying consolidated financial statements have
period adjustments, which (decreased) increased net income by
been prepared in accordance with U.S. generally accepted
$(399) million and $65 million, respectively. During 2007, out-of-
accounting principles (GAAP). All material intercompany accounts
period adjustments collectively decreased pre-tax operating in-
and transactions have been eliminated.
come by $372 million ($399 million after tax). The adjustments
Description of Business were comprised of a charge of $380 million ($247 million after
tax) to reverse net gains on transfers of investment securities
See Note 2 herein for a description of AIG’s businesses.
among legal entities consolidated within AIGFP and a correspond-
Use of Estimates ing increase to accumulated other comprehensive income (loss);
$156 million of additional income tax expense related to the
The preparation of financial statements in conformity with GAAP
successful remediation of the material weakness in internal
requires management to make estimates and assumptions that
control over income tax accounting; $142 million ($92 million
affect the reported amounts of assets and liabilities, the
after tax) of additional expense related to insurance reserves and
disclosure of contingent assets and liabilities at the date of the
DAC in connection with improvements in its internal control over
financial statements and the reported amounts of revenues and
financial reporting and consolidation processes; $42 million
expenses during the reporting periods. Actual results could differ,
($29 million after tax) of additional expense, primarily related to
possibly materially, from those estimates.
other remediation activities; and $192 million ($125 million after
AIG considers its most critical accounting estimates to be
tax) of net realized capital gains related to foreign exchange.
those with respect to reserves for losses and loss expenses,
future policy benefits for life and accident and health contracts, Accounting Policies
estimated gross profits for investment-oriented products, recover-
(a) Revenue Recognition and Expenses:
ability of deferred policy acquisition costs (DAC), fair value
measurements of certain assets and liabilities, including the Premiums and Other Considerations: Premiums for short duration
super senior credit default swaps written by AIGFP, other-than- contracts and considerations received from retailers in connection
temporary impairments in the value of investments, the allowance with the sale of extended service contracts are earned primarily on a
for finance receivable losses and flight equipment recoverability. pro rata basis over the term of the related coverage. The reserve for
During the second half of 2007, disruption in the global credit unearned premiums includes the portion of premiums written and
markets, coupled with the repricing of credit risk, and the other considerations relating to the unexpired terms of coverage.
U.S. housing market deterioration, particularly in the fourth Premiums for long duration insurance products and life
quarter, created increasingly difficult conditions in the financial contingent annuities are recognized as revenues when due.
markets. These conditions have resulted in greater volatility, less Estimates for premiums due but not yet collected are accrued.
liquidity, widening of credit spreads and a lack of price trans- Consideration for universal life and investment-type products
parency in certain markets and have made it more difficult to consists of policy charges for the cost of insurance, administra-
value certain of AIG’s invested assets and the obligations and tion, and surrenders during the period. Policy charges collected
collateral relating to certain financial instruments issued or held with respect to future services are deferred and recognized in a
by AIG, such as AIGFP’s super senior credit default swap portfolio. manner similar to DAC related to such products.
Revisions and Reclassifications Net Investment Income: Net investment income represents in-
come primarily from the following sources in AIG’s insurance
In 2007, AIG determined that certain products that were historically
operations:
reported as separate account assets under American Institute of
(Interest income and related expenses, including amortization of
Certified Public Accountants (AICPA) Statement of Position
premiums and accretion of discounts on bonds with changes in
(SOP) 03-1, ‘‘Accounting and Reporting by Insurance Enterprises for
138 AIG 2007 Form 10-K