AIG 2008 Annual Report Download - page 224

AIG adopted the following accounting standards during 2008:
FAS 157
In September 2006, the FASB issued Statement of Financial Accounting Standards (FAS) No. 157, “Fair Value
Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and
expands disclosure requirements regarding fair value measurements but does not change existing guidance about
whether an asset or liability is carried at fair value. FAS 157 nullifies the guidance in EITF 02-3 that precluded the
recognition of a trading profit at the inception of a derivative contract unless the fair value of such contract was
obtained from a quoted market price or other valuation technique incorporating observable market data. FAS 157
also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value. The fair
value measurement and related disclosure guidance in FAS 157 do not apply to fair value measurements associated
with AIG’s share-based employee compensation awards accounted for in accordance with FAS 123(R), “Share-
Based Payment.”
AIG adopted FAS 157 on January 1, 2008, its required effective date. FAS 157 must be applied prospectively,
except for certain stand-alone derivatives and hybrid instruments initially measured using the guidance in
EITF 02-3, which must be applied as a cumulative effect of change in accounting principle to retained earnings
at January 1, 2008. The cumulative effect, net of taxes, of adopting FAS 157 on AIG’s consolidated balance sheet
was an increase in retained earnings of $4 million.
The most significant effect of adopting FAS 157 on AIG’s consolidated results of operations for 2008 related to
changes in fair value methodologies with respect to both liabilities already carried at fair value, primarily hybrid
notes and derivatives, and newly elected liabilities measured at fair value (see FAS 159 discussion below).
Specifically, the incorporation of AIG’s own credit spreads and the incorporation of explicit risk margins
(embedded policy derivatives at transition only) resulted in a increase in pre-tax loss of $1.8 billion ($1.2 billion
after tax) for 2008. The effects of the changes in AIG’s own credit spreads on pre-tax income for AIGFP was an
increase of $1.4 billion for 2008. The effect of the changes in counterparty credit spreads for assets measured at fair
value at AIGFP was a decrease in pre-tax income of $10.7 billion for 2008.
See Note 4 to the Consolidated Financial Statements for additional FAS 157 disclosures.
FAS 159
In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (FAS 159). FAS 159 permits entities to choose to measure at fair value many financial instruments and
certain other items that are not required to be measured at fair value. Subsequent changes in fair value for designated
items are required to be reported in income. FAS 159 also establishes presentation and disclosure requirements for
similar types of assets and liabilities measured at fair value. FAS 159 permits the fair value option election on an
instrument-by-instrument basis for eligible items existing at the adoption date and at initial recognition of an asset
or liability, or upon most events that give rise to a new basis of accounting for that instrument.
AIG adopted FAS 159 on January 1, 2008, its required effective date. The adoption of FAS 159 with respect to
elections made in the Life Insurance & Retirement Services segment resulted in an after-tax decrease to 2008
opening retained earnings of $559 million. The adoption of FAS 159 with respect to elections made by AIGFP
resulted in an after-tax decrease to 2008 opening retained earnings of $448 million. Included in this amount are net
unrealized gains of $105 million that were reclassified to retained earnings from accumulated other comprehensive
income (loss) related to available for sale securities recorded in the consolidated balance sheet at January 1, 2008 for
which the fair value option was elected.
See Note 4 to the Consolidated Financial Statements for additional FAS 159 disclosures.
218 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)