Allstate 2012 Annual Report Download - page 194

charges and administrative expenses. Contractholder funds also include reserves for secondary guarantees on interest-
sensitive life insurance and certain fixed annuity contracts and reserves for certain guarantees on reinsured variable
annuity contracts.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and
available only to settle separate account contract obligations. Separate accounts liabilities represent the
contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets.
Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders
and therefore are not included in the Company’s Consolidated Statements of Operations. Deposits to and surrenders
and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in
consolidated cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life
insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated
investment objectives. Substantially all of the Company’s variable annuity business was reinsured beginning in 2006.
Deferred Employee Stock Ownership Plan (‘‘ESOP’’) expense
Deferred ESOP expense represents the remaining unrecognized cost of shares acquired by the Allstate ESOP to
pre-fund a portion of the Company’s contribution to the Allstate 401(k) Savings Plan.
Equity incentive plans
The Company currently has equity incentive plans that permit the Company to grant nonqualified stock options,
incentive stock options and restricted stock units (‘‘equity awards’’) to certain employees and directors of the Company.
The Company recognizes the fair value of equity awards computed at the award date over the period in which the
requisite service is rendered. The Company uses a binomial lattice model to determine the fair value of employee stock
options.
Off-balance-sheet financial instruments
Commitments to invest, commitments to purchase private placement securities, commitments to extend loans,
financial guarantees and credit guarantees have off-balance-sheet risk because their contractual amounts are not
recorded in the Company’s Consolidated Statements of Financial Position (see Note 7 and Note 14).
Consolidation of variable interest entities (‘‘VIEs’’)
The Company consolidates VIEs when it is the primary beneficiary. A primary beneficiary is the entity with both the
power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the
obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE (see Note 12).
Foreign currency translation
The local currency of the Company’s foreign subsidiaries is deemed to be the functional currency of the country in
which these subsidiaries operate. The financial statements of the Company’s foreign subsidiaries are translated into U.S.
dollars at the exchange rate in effect at the end of a reporting period for assets and liabilities and at average exchange
rates during the period for results of operations. The unrealized gains and losses from the translation of the net assets
are recorded as unrealized foreign currency translation adjustments and included in accumulated other comprehensive
income. Changes in unrealized foreign currency translation adjustments are included in other comprehensive income.
Gains and losses from foreign currency transactions are reported in operating costs and expenses and have not been
material.
Earnings per share
Basic earnings per share is computed using the weighted average number of common shares outstanding, including
unvested participating restricted stock units. Diluted earnings per share is computed using the weighted average
number of common and dilutive potential common shares outstanding. For the Company, dilutive potential common
shares consist of outstanding stock options and unvested non-participating restricted stock units.
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