AIG 2010 Annual Report Download - page 232

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
service coverage ratio, loan-to-value or the ratio of the loan balance to the estimated value of the property,
property occupancy, profile of the borrower and major property tenants, economic trends in the market where the
property is located, and condition of the property. Mortgage and other loans receivable are considered impaired
when collection of all amounts due under contractual terms is not probable. This impairment is generally
measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate
subject to the fair value of underlying collateral. Interest income on such impaired loans is recognized as cash is
received.
Mortgage and other loans receivable also include policy loans which are carried at unpaid principal amount.
There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death
claim is made and the balances are effectively collateralized by the cash surrender value of the policy.
Finance receivables — net: Finance receivables, which are reported net of unearned finance charges, are held for
both investment purposes and for sale. Finance receivables held for investment purposes are carried at amortized
cost, which includes accrued finance charges on interest bearing finance receivables, unamortized deferred
origination costs, and unamortized net premiums and discounts on purchased finance receivables. The allowance
for finance receivable losses is established through the provision for finance receivable losses charged to Other
expenses and is maintained at a level considered adequate to absorb probable credit losses in the portfolio. The
portfolio is periodically evaluated on a pooled basis and factors such as economic conditions, portfolio
composition, and loss and delinquency experience are considered in the evaluation of the allowance.
Direct costs of originating finance receivables, net of nonrefundable points and fees, are deferred and included
in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment
to finance charge revenues using the interest method.
Finance receivables originated and intended for sale in the secondary market are carried at the lower of cost or
fair value, as determined by aggregate outstanding commitments from investors, current investor yield
requirements or negotiations with prospective purchasers, if any.
Flight equipment primarily under operating leases — net: Flight equipment is stated at cost (adjusted for any
impairment charges), net of accumulated depreciation. Major additions, modifications and interest are capitalized.
Normal maintenance and repairs, airframe and engine overhauls and compliance with return conditions of flight
equipment on lease are provided by and paid for by the lessee. Under the provisions of most leases for certain
airframe and engine overhauls, the lessee is reimbursed for certain costs incurred up to but not exceeding
contingent rentals paid to ILFC by the lessee. ILFC provides a charge to income for such reimbursements based
on the expected reimbursements during the life of the lease. For passenger aircraft, depreciation is generally
computed on the straight-line basis to a residual value of approximately 15 percent of the cost of the asset over its
estimated useful life of 25 years. For freighter aircraft, depreciation is computed on the straight-line basis to a
zero residual value over its useful life of 35 years.
Aircraft in the fleet are evaluated for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the
carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. These
evaluations for impairment are significantly affected by estimates of future net cash flows and other factors that
involve uncertainty. There are a number of factors and circumstances that can influence (and increase) the
potential for recognizing an impairment loss. A firm commitment to sell aircraft would result in aircraft being
reclassified from held for use to held for sale for financial reporting purposes and would require an impairment
assessment based on the aircraft’s fair value. An increase in the likelihood of a sale transaction being completed
could result in a similar impairment assessment if the probability of an aircraft sale becomes high enough to
reduce the probability weighted expected undiscounted future cash flows to be realized from the aircraft to an
amount that is less than its carrying value.
216 AIG 2010 Form 10-K