AIG 2007 Annual Report Download - page 199

American International Group, Inc. and Subsidiaries
representing the difference between the fair value of these hybrid
1. Summary of Significant Accounting Policies
financial instruments and the prior carrying value as of Decem-
Continued
ber 31, 2005. The effect of adoption on after-tax gross gains and
earnings per share is based on those shares used in basic losses was $218 million ($336 million pre-tax) and $229 million
earnings per share plus shares that would have been outstanding ($354 million pre-tax), respectively.
assuming issuance of common shares for all dilutive potential In connection with AIG’s early adoption of FAS 155, structured
common shares outstanding, adjusted to reflect all stock divi- note liabilities of $8.9 billion, other structured liabilities in
dends and stock splits. conjunction with equity derivative transactions of $111 million,
(hh) Recent Accounting Standards: and hybrid financial instruments of $522 million at December 31,
2006 are now carried at fair value. The effect on earnings for
Accounting Changes 2006, for changes in the fair value of hybrid financial instruments,
was a pre-tax loss of $313 million, of which $287 million was
SOP 05-1
reflected in Other income and was largely offset by gains on
In September 2005, the AICPA issued SOP 05-1, ‘‘Accounting by economic hedge positions which were also reflected in operating
Insurance Enterprises for Deferred Acquisition Costs in Connection income, and $26 million was reflected in Net investment income.
with Modifications or Exchanges of Insurance Contracts’’ (SOP 05-
1). SOP 05-1 provides guidance on accounting for internal FAS 158
replacements of insurance and investment contracts other than
those specifically described in FAS 97. SOP 05-1 defines an In September 2006, the FASB issued FAS 158, ‘‘Employers’
internal replacement as a modification in product benefits, Accounting for Defined Benefit Pension and Other Postretirement
features, rights, or coverage that occurs by the exchange of a Plans — an amendment of FASB Statements No. 87, 88, 106 and
contract for a new contract, or by amendment, endorsement, or 132R’’ (FAS 158). FAS 158 requires AIG to prospectively recognize
rider to a contract, or by the election of a feature or coverage the overfunded or underfunded status of defined benefit postretire-
within a contract. Internal replacements that result in a substan- ment plans as an asset or liability in AIG’s consolidated balance
tially changed contract are accounted for as a termination and a sheet and to recognize changes in that funded status in the year in
replacement contract. which the changes occur through Other comprehensive income. FAS
SOP 05-1 became effective on January 1, 2007 and generally 158 also requires AIG to measure the funded status of plans as of
affects the accounting for internal replacements occurring after the date of its year-end balance sheet, with limited exceptions. AIG
that date. In the first quarter of 2007, AIG recorded a cumulative adopted FAS 158 for the year ended December 31, 2006. The
effect reduction of $82 million, net of tax, to the opening balance cumulative effect, net of deferred income taxes, on AIG’s consoli-
of retained earnings on the date of adoption. This adoption dated balance sheet at December 31, 2006 was a net reduction in
reflected changes in unamortized DAC, VOBA, deferred sales shareholders’ equity through a charge to Accumulated other
inducement assets, unearned revenue liabilities and future policy comprehensive income (loss) of $532 million, with a corresponding
benefits for life and accident and health insurance contracts net decrease of $538 million in total assets, and a net decrease of
resulting from a shorter expected life related to certain group life $6 million in total liabilities. See Note 18 herein for additional
and health insurance contracts and the effect on the gross profits information on the adoption of FAS 158.
of investment-oriented products related to previously anticipated
future internal replacements. This cumulative effect adjustment FIN 48
affected only the Life Insurance & Retirement Services segment. In July 2006, the FASB issued FASB Interpretation No. (FIN) 48,
FAS 155 ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109’’ (FIN 48), which clarifies the accounting
In February, 2006, the Financial Accounting Standards Board for uncertainty in income tax positions. FIN 48 prescribes a
(FASB) issued FAS 155, ‘‘Accounting for Certain Hybrid Financial recognition threshold and measurement attribute for the financial
Instruments — an amendment of FAS 140 and FAS 133’’ (FAS statement recognition and measurement of an income tax position
155). FAS 155 allows AIG to include changes in fair value in taken or expected to be taken in a tax return. FIN 48 also
earnings on an instrument-by-instrument basis for any hybrid provides guidance on derecognition, classification, interest and
financial instrument that contains an embedded derivative that penalties, accounting in interim periods, and additional disclo-
would otherwise be required to be bifurcated and accounted for sures. AIG adopted FIN 48 on January 1, 2007. Upon adoption,
separately under FAS 133. The election to measure the hybrid AIG recognized a $71 million increase in the liability for unrecog-
instrument at fair value is irrevocable at the acquisition or nized tax benefits, which was accounted for as a decrease to
issuance date. opening retained earnings as of January 1, 2007. See Note 21
AIG elected to early adopt FAS 155 as of January 1, 2006, and for additional FIN 48 disclosures.
apply FAS 155 fair value measurement to certain structured note
liabilities and structured investments in AIG’s available for sale FSP 13-2
portfolio that existed at December 31, 2005. The effect of this
adoption resulted in an $11 million after-tax ($18 million pre-tax) In July 2006, the FASB issued FASB Staff Position
decrease to opening retained earnings as of January 1, 2006, No. (FSP) FAS 13-2, ‘‘Accounting for a Change or Projected
AIG 2007 Form 10-K 145