AIG 2010 Annual Report Download - page 184

American International Group, Inc., and Subsidiaries
particularly in cases in which claimants seek substantial or indeterminate damages, AIG often cannot predict the
outcome or estimate the eventual loss or range of loss related to such matters.
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
related to differences between book carrying value and tax basis of subsidiaries, as well as the level of judgment
and 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.
Valuation Allowance on Deferred Tax Assets:
AIG had a net deferred tax liability after valuation allowance of $1.3 billion at December 31, 2010, and a net
deferred tax asset after valuation allowance of $5.9 billion at December 31, 2009.
AIG evaluates the recoverability of the deferred tax asset and establishes a valuation allowance, 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). Significant judgment is required to determine whether a valuation allowance is necessary and the
amount of such valuation allowance, if appropriate.
When assessing the realization of its deferred tax asset, AIG considers all available evidence, including:
• the nature, frequency, and severity of cumulative financial reporting losses in recent years;
• the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards;
• predictability of future operating profitability of the character necessary to realize the asset;
• certain transactions, including the recognition of the gains and losses on dispositions;
• prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the
loss of the deferred tax asset; and
• the effect of reversing taxable temporary differences.
The evaluation of the recoverability of the deferred tax asset requires AIG to weigh all positive and negative
evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets
will not be realized. The weight given to the evidence is commensurate with the extent to which it can be
objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more
difficult it is to support a conclusion that a valuation allowance is not needed. As part of the evaluation at
December 31, 2010, despite several favorable developments, including the completion of the Recapitalization in
January 2011, the wind-down of AIGFP’s portfolios, and the sale of AGF, AIG has recent negative evidence of
cumulative operating losses and a lack of predictable profits. Based on this evidence, AIG cannot assert that it is
more likely than not that any U.S. member deferred tax assets will be realized as of December 31, 2010.
However, if in the future AIG demonstrates consistent profitability, ability to accurately project income by
jurisdiction and the resultant annual effective tax rate, or develops prudent and feasible tax planning strategies,
the evaluation of the recoverability of the deferred tax asset could change and the valuation allowance could be
released in whole or in part.
AIG has developed the comprehensive qualitative and quantitative assessment framework described above for
evaluating the factors that would need to be considered each reporting period in assessing whether the deferred
tax asset is more likely than not realizable.
168 AIG 2010 Form 10-K