AIG 2007 Annual Report Download - page 195

American International Group, Inc. and Subsidiaries
through the use of forwards, futures and option contracts. Lower
1. Summary of Significant Accounting Policies
of cost or fair value reductions in commodity positions and
Continued
unrealized gains and losses in related derivatives are reflected in
compliance with return conditions of flight equipment on lease are Other income.
provided by and paid for by the lessee. Under the provisions of
most leases for certain airframe and engine overhauls, the lessee (i) Financial Services — Unrealized Gain and Unrealized
is reimbursed for certain costs incurred up to but not exceeding Loss on Swaps, Options and Forward Transactions: Inter-
contingent rentals paid to AIG by the lessee. AIG provides a est rate, currency, equity and commodity swaps (including AIGFP’s
charge to income for such reimbursements based on the expected super senior credit default swap portfolio), swaptions, options and
reimbursements during the life of the lease. For passenger forward transactions are accounted for as derivatives recorded on
aircraft, depreciation is generally computed on the straight-line a trade-date basis, and carried at fair value. Unrealized gains and
basis to a residual value of approximately 15 percent of the cost losses are reflected in income, when appropriate. In certain
of the asset over its estimated useful life of 25 years. For instances, when income is not recognized at inception of the
freighter aircraft, depreciation is computed on the straight-line contract under EITF 02-3, income is recognized over the life of the
basis to a zero residual value over its useful life of 35 years. At contract and as observable market data becomes available.
December 31, 2007, ILFC had twelve freighter aircraft in its fleet. (j) Financial Services — Trade Receivables and Trade Pay-
Aircraft in the fleet are evaluated for impairment in accordance ables: Trade receivables and Trade payables include option
with FAS 144. FAS 144 requires long-lived assets to be evaluated premiums paid and received and receivables from and payables to
for impairment whenever events or changes in circumstances counterparties that relate to unrealized gains and losses on
indicate the carrying amount of an asset may not be recoverable. futures, forwards, and options and balances due from and due to
Recoverability of assets is measured by comparing the carrying clearing brokers and exchanges.
amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. These evaluations for (k) Financial Services — Securities Purchased (Sold)
impairment are significantly affected by estimates of future net Under Agreements to Resell (Repurchase), at contract
cash flows and other factors that involve uncertainty. value: Securities purchased under agreements to resell and
When assets are retired or disposed of, the cost and Securities sold under agreements to repurchase are accounted for
associated accumulated depreciation are removed from the as collateralized borrowing or lending transactions and are
related accounts and the difference, net of proceeds, is recorded recorded at their contracted resale or repurchase amounts, plus
as a gain or loss in Other income. accrued interest. AIG’s policy is to take possession of or obtain a
security interest in securities purchased under agreements to
(f) Financial Services — Securities Available for Sale, at resell.
fair value: These securities are held to meet long-term invest- AIG minimizes the credit risk that counterparties to transac-
ment objectives and are accounted for as available for sale, tions might be unable to fulfill their contractual obligations by
carried at fair values and recorded on a trade-date basis. This monitoring customer credit exposure and collateral value and
portfolio is hedged using interest rate, foreign exchange, commod- generally requiring additional collateral to be deposited with AIG
ity and equity derivatives. The market risk associated with such when necessary.
hedges is managed on a portfolio basis, with third-party hedging
transactions executed as necessary. Because hedge accounting (l) Financial Services — Finance Receivables: Finance re-
treatment is not achieved in accordance with FAS 133, ‘‘Account- ceivables, which are reported net of unearned finance charges,
ing for Derivative Instruments and Hedging Activities’’ (FAS 133), are held for both investment purposes and for sale. Finance
the unrealized gains and losses on these securities resulting from receivables held for investment purposes are carried at amortized
changes in interest rates, currency rates and equity prices are cost, which includes accrued finance charges on interest bearing
recorded in Accumulated other comprehensive income (loss) in finance receivables, unamortized deferred origination costs, and
consolidated shareholders’ equity while the unrealized gains and unamortized net premiums and discounts on purchased finance
losses on the hedging instruments are reflected in Other income. receivables. The allowance for finance receivable losses is
established through the provision for finance receivable losses
(g) Financial Services — Trading Securities, at fair value: charged to expense and is maintained at a level considered
Trading securities are held to meet short-term investment objec- adequate to absorb estimated credit losses in the portfolio. The
tives and to economically hedge other securities. Trading securi- portfolio is periodically evaluated on a pooled basis and factors
ties are recorded on a trade-date basis and carried at fair value. such as economic conditions, portfolio composition, and loss and
Realized and unrealized gains and losses are reflected in Other delinquency experience are considered in the evaluation of the
income. allowance.
(h) Financial Services — Spot Commodities: Spot commodi- Direct costs of originating finance receivables, net of
ties held in AIGFP’s wholly owned broker-dealer subsidiary are nonrefundable points and fees, are deferred and included in the
recorded at fair value. All other commodities are recorded at the carrying amount of the related receivables. The amount deferred
lower of cost or fair value. Spot commodities are recorded on a is amortized to income as an adjustment to finance charge
trade-date basis. The exposure to market risk may be reduced revenues using the interest method.
AIG 2007 Form 10-K 141