AIG 2007 Annual Report Download - page 193

American International Group, Inc. and Subsidiaries
(Changes in the fair value of derivatives (excluding the super
1. Summary of Significant Accounting Policies
senior credit default swap portfolio). In certain instances, no
Continued
initial gain or loss is recognized in accordance with Emerging
the timing and the amount of expected principal and interest Issues Task Force Issue (EITF) 02-3, ‘‘Issues Involved in
cash flows reflected in the yield, as applicable. Accounting for Derivative Contracts Held for Trading Purposes
(Dividend income and distributions from common and preferred and Contracts Involved in Energy Trading and Risk Management
stock and other investments when receivable. Activities’’ (EITF 02-3). The initial gain or loss is recognized in
(Realized and unrealized gains and losses from investments in income over the life of the transaction or when observable
trading securities accounted for at fair value. market data becomes available.
(Earnings from hedge funds and limited partnership investments
(Realized and unrealized gains and losses from trading securi-
accounted for under the equity method. ties and spot commodities sold but not yet purchased, futures
(The difference between the carrying amount of a life settle- and hybrid financial instruments.
ment contract and the life insurance proceeds of the underlying
(Realized gains and losses from the sale of available for sale
life insurance policy recorded in income upon the death of the securities and investments in private equities, joint ventures,
insured. limited partnerships and other investments.
Realized Capital Gains (Losses): Realized capital gains and losses (Exchange gains and losses resulting from foreign currency
are determined by specific identification. The realized capital gains transactions.
and losses are generated primarily from the following sources: (Reductions to the cost basis of securities available for sale for
(Sales of fixed maturity securities and equity securities (except other-than-temporary impairments.
trading securities accounted for at fair value), real estate, (Earnings from hedge funds and limited partnership investments
investments in joint ventures and limited partnerships and accounted for under the equity method.
other types of investments. Finance charges on consumer loans are recognized as revenue
(Reductions to the cost basis of fixed maturity securities and using the interest method. Revenue ceases to be accrued when
equity securities (except trading securities accounted for at fair contractual payments are not received for four consecutive
value) and other invested assets for other-than-temporary months for loans and retail sales contracts, and for six months for
impairments. revolving retail accounts and private label receivables. Extension
(Changes in fair value of derivatives that are not involved in fees, late charges, and prepayment penalties are recognized as
qualifying hedging activities. revenue when received.
(Exchange gains and losses resulting from foreign currency Incurred Policy Losses and Benefits: Incurred policy losses for
transactions. short duration insurance contracts consist of the estimated
Other Income: Other income includes income from flight equip- ultimate cost of settling claims incurred within the reporting
ment, Asset Management operations, the operations of AIGFP and period, including incurred but not reported claims, plus the
finance charges on consumer loans. changes in estimates of current and prior period losses resulting
Income from flight equipment under operating leases is from the continuous review process. Benefits for long duration
recognized over the life of the lease as rentals become receivable insurance contracts consist of benefits paid and changes in future
under the provisions of the lease or, in the case of leases with policy benefits liabilities. Benefits for universal life and investment-
varying payments, under the straight-line method over the noncan- type products primarily consist of interest credited to policy
celable term of the lease. In certain cases, leases provide for account balances and benefit payments made in excess of policy
additional payments contingent on usage. Rental income is account balances.
recognized at the time such usage occurs less a provision for (b) Income Taxes: Deferred tax assets and liabilities are
future contractual aircraft maintenance. Gains and losses on flight recorded for the effects of temporary differences between the tax
equipment are recognized when flight equipment is sold and the basis of an asset or liability and its reported amount in the
risk of ownership of the equipment is passed to the new owner. consolidated financial statements. AIG assesses its ability to
Income from Asset Management operations is generally recog- realize deferred tax assets primarily based on the earnings
nized as revenues as services are performed. Certain costs history, the future earnings potential, the reversal of taxable
incurred in the sale of mutual funds are deferred and subse- temporary differences, and the tax planning strategies available to
quently amortized. the legal entities when recognizing deferred tax assets in
Income from the operations of AIGFP included in other income accordance with Statement of Financial Accounting Standards No.
consists of the following: (FAS) 109, ‘‘Accounting for Income Taxes’’ (FAS 109). See
(Interest income and related expenses, including amortization of Note 21 herein for a further discussion of income taxes.
premiums and accretion of discounts on bonds with changes in
the timing and the amount of expected principal and interest (c) Investments in Fixed Maturities and Equity Securities:
cash flows reflected in the yield, as applicable. Bonds held to maturity are principally owned by insurance
(Dividend income and distributions from common and preferred subsidiaries and are carried at amortized cost when AIG has the
stock and other investments when receivable. ability and positive intent to hold these securities until maturity.
AIG 2007 Form 10-K 139