AIG 2010 Annual Report Download - page 246

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting and Reporting for Decreases in Ownership of a Subsidiary
In January 2010, the FASB issued an accounting standard that clarifies that the partial sale and deconsolidation
provisions of the accounting standards addressing consolidation should be applied to (1) a business that is not in
the legal form of a subsidiary, (2) transactions with equity method investees and joint ventures, (3) exchanges of
groups of assets that constitute businesses for noncontrolling interests in other entities and (4) the deconsolidation
of a subsidiary that does not qualify as a business if the substance of the transaction is not addressed directly by
other guidance, and that the accounting standards addressing consolidation do not apply to the sales of
in-substance real estate. The adoption of the new standard did not have a material effect on AIG’s consolidated
financial condition, results of operations or cash flows.
Accounting Standards Adopted During 2008
Fair Value Measurements and Fair Value Option
In September 2006, the FASB issued an accounting standard that defined fair value, established a framework for
measuring fair value and expands disclosure requirements regarding fair value measurements but did not change
existing guidance about whether an asset or liability is carried at fair value. The standard nullifies the guidance
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. The standard 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 the standard do not apply
to fair value measurements associated with AIG’s share-based employee compensation awards.
AIG adopted the standard on January 1, 2008, its required effective date. The standard was applied
prospectively, except for certain stand-alone derivatives and hybrid instruments, which were 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 the standard on AIG’s Consolidated Balance Sheet was an increase in retained earnings
of $4 million.
The most significant effect of adopting the standard 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. 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 Direct Investment business and
Capital Markets 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 Direct Investment business and Capital Markets was a decrease in pre-tax
income of $10.7 billion for 2008.
See Note 6 herein for additional disclosures.
In February 2007, the FASB issued an accounting standard that 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. The standard also
establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair
value. The standard 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 the standard on January 1, 2008, its required effective date. The adoption of the standard with
respect to elections made for its domestic and foreign life insurance businesses resulted in an after-tax decrease to
2008 opening retained earnings of $559 million. The adoption of this standard with respect to elections made by
Direct Investment business and Capital Markets resulted in an after-tax decrease to 2008 opening retained
230 AIG 2010 Form 10-K