AIG 2007 Annual Report Download - page 197

American International Group, Inc. and Subsidiaries
(v) Goodwill: Goodwill is the excess of cost over the fair value
1. Summary of Significant Accounting Policies
of identifiable net assets acquired. Goodwill is reviewed for
Continued
impairment on an annual basis, or more frequently if circum-
maturity and equity securities available for sale that is credited or stances indicate that a possible impairment has occurred. The
charged directly to Accumulated other comprehensive income assessment of impairment involves a two-step process whereby
(loss). Value of Business Acquired (VOBA) is determined at the an initial assessment for potential impairment is performed,
time of acquisition and is reported in the consolidated balance followed by a measurement of the amount of impairment, if any.
sheet with DAC. This value is based on the present value of future Impairment testing is per formed using the fair value approach,
pre-tax profits discounted at yields applicable at the time of which requires the use of estimates and judgment, at the
purchase. For products accounted for under FAS 60, VOBA is ‘‘reporting unit’’ level. A reporting unit is the operating segment,
amortized over the life of the business similar to that for DAC or a business that is one level below the operating segment if
based on the assumptions at purchase. For products accounted discrete financial information is prepared and regularly reviewed by
for under FAS 97, VOBA is amortized in relation to the estimated management at that level. The determination of a reporting unit’s
gross profits to date for each period. As of December 31, 2007 fair value is based on management’s best estimate, which
and 2006, there had been no impairments of VOBA. generally considers the market-based earning multiples of the
(s) Investments in Partially Owned Companies: Invest- unit’s peer companies or expected future cash flows. If the
ments in partially owned companies represents investments carrying value of a reporting unit exceeds its fair value, an
entered into for strategic purposes and not solely for capital impairment is recognized as a charge against income equal to the
appreciation or for income generation. These investments are excess of the carrying value of goodwill over its fair value. No
accounted for under the equity method. All other equity method impairments were recorded in 2007, 2006 or 2005. Changes in
investments are reported in Other invested assets. At Decem- the carrying amount of goodwill result from business acquisitions,
ber 31, 2007, AIG’s significant investments in partially owned the payment of contingent consideration, foreign currency transla-
companies included its 26.0 percent interest in Tata AIG Life tion adjustments and purchase price adjustments.
Insurance Company, Ltd., its 26.0 percent interest in Tata AIG (w) Other Assets: Other assets consist of prepaid expenses,
General Insurance Company, Ltd. and its 25.4 percent interest in including deferred advertising costs, sales inducement assets,
The Fuji Fire and Marine Insurance Co., Ltd. Dividends received non-AIGFP derivatives assets carried at fair value, deposits, other
from unconsolidated entities in which AIG’s ownership interest is deferred charges and other intangible assets.
less than 50 percent were $30 million, $28 million and Certain direct response advertising costs are deferred and
$146 million for the years ended December 31, 2007, 2006 and amortized over the expected future benefit period in accordance
2005, respectively. The undistributed earnings of unconsolidated with SOP 93-7, ‘‘Reporting on Advertising Costs.’’ When AIG can
entities in which AIG’s ownership interest is less than 50 percent demonstrate that its customers have responded specifically to
were $266 million, $300 million and $179 million at Decem- direct-response advertising, the primary purpose of which is to
ber 31, 2007, 2006 and 2005, respectively. elicit sales to customers, and when it can be shown such
(t) Real Estate and Other Fixed Assets: The costs of advertising results in probable future economic benefits, the
buildings and furniture and equipment are depreciated principally advertising costs are capitalized. Deferred advertising costs are
on the straight-line basis over their estimated useful lives amortized on a cost-pool-by-cost-pool basis over the expected
(maximum of 40 years for buildings and ten years for furniture and future economic benefit period and are reviewed regularly for
equipment). Expenditures for maintenance and repairs are recoverability. Deferred advertising costs totaled $1.35 billion and
charged to income as incurred; expenditures for betterments are $1.05 billion at December 31, 2007 and 2006, respectively. The
capitalized and depreciated. AIG periodically assesses the carrying amount of expense amortized into income was $395 million,
value of its real estate for purposes of determining any asset $359 million and $272 million, for the years ended 2007, 2006,
impairment. and 2005, respectively.
Also included in Real Estate and Other Fixed Assets are AIG offers sales inducements, which include enhanced credit-
capitalized software costs, which represent costs directly related ing rates or bonus payments to contract holders (bonus interest)
to obtaining, developing or upgrading internal use software. Such on certain annuity and investment contract products. Sales
costs are capitalized and amortized using the straight-line method inducements provided to the contractholder are recognized as part
over a period generally not exceeding five years. of the liability for policyholders’ contract deposits in the consoli-
dated balance sheet. Such amounts are deferred and amortized
(u) Separate and Variable Accounts: Separate and variable over the life of the contract using the same methodology and
accounts represent funds for which investment income and assumptions used to amortize DAC. To qualify for such accounting
investment gains and losses accrue directly to the policyholders treatment, the bonus interest must be explicitly identified in the
who bear the investment risk. Each account has specific invest- contract at inception, and AIG must demonstrate that such
ment objectives, and the assets are carried at fair value. The amounts are incremental to amounts AIG credits on similar
assets of each account are legally segregated and are not subject contracts without bonus interest, and are higher than the
to claims that arise out of any other business of AIG. The contract’s expected ongoing crediting rates for periods after the
liabilities for these accounts are equal to the account assets. bonus period. The deferred bonus interest and other deferred
AIG 2007 Form 10-K 143