AIG 2009 Annual Report Download - page 134

American International Group, Inc., and Subsidiaries
Valuation Allowance on Deferred Tax Assets:
At December 31, 2009 and December 31, 2008, AIG recorded net deferred tax assets after valuation allowances of
$5.9 billion and $11 billion, respectively. A valuation allowance is established, if necessary, to reduce the deferred tax
asset to an amount that is more likely than not to be realized (a likelihood of more than 50 percent). Realization of
AIG’s net deferred tax asset depends upon its ability to generate sufficient earnings from transactions expected to be
completed in the near future and tax planning strategies that would be implemented, if necessary, to protect against
the loss of the deferred tax assets, but does not depend on projected future operating income.
When making its assessment about the realization of its deferred tax assets at December 31, 2009, AIG considered
all available evidence, including:
• the nature, frequency, and severity of current and cumulative financial reporting losses;
• transactions completed including the AIA and ALICO SPV transactions on December 1, 2009 and the sale of
Otemachi building in Tokyo, and transactions expected to be completed in the near future;
• the carryforward periods for the net operating and capital loss and foreign tax credit carryforwards; and
• tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax
assets.
Estimates of future taxable income generated from specific transactions and tax planning strategies discussed above
could change in the near term, perhaps materially, which may require AIG to adjust its valuation allowance. Such
adjustment, either positive or negative, could be material to AIG’s consolidated financial condition or its results of
operations for an individual reporting period.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries:
Due to the complexity of the U.S. federal income tax laws involved in determining the amount of income taxes
incurred on potential dispositions, as well as AIG’s reliance on reasonable assumptions and estimates in calculating
this liability, AIG considers the U.S. federal income taxes accrued on the earnings of certain foreign subsidiaries to be
a critical accounting estimate.
Fair Value Measurements of Certain Financial Assets and Liabilities:
Overview
AIG measures at fair value on a recurring basis financial instruments in its trading and available for sale securities
portfolios, certain mortgage and other loans receivable, derivative assets and liabilities, securities purchased/sold
under agreements to resell/repurchase, securities lending invested collateral, non-traded equity investments and
certain private limited partnerships and certain hedge funds included in other invested assets, certain short-term
investments, separate and variable account assets, certain policyholder contract deposits, securities and spot
commodities sold but not yet purchased, certain trust deposits and deposits due to banks and other depositors, certain
CPFF borrowings, certain long-term debt, and certain hybrid financial instruments included in Other liabilities. The
fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between willing, able and knowledgeable market participants at the measurement date.
The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level
of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing
observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in
other-than-active markets or that do not have quoted prices have less observability and are measured at fair value
using valuation models or other pricing techniques that require more judgment. An active market is one in which
transactions for the asset or liability being valued occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices
are not current, price quotations vary substantially either over time or among market makers, or in which little
information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of
AIG 2009 Form 10-K 126