2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Continued
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 AIG by the lessee. AIG 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. At
December 31, 2007, ILFC had twelve freighter aircraft in its fleet.
Aircraft in the fleet are evaluated for impairment in accordance
with FAS 144. FAS 144 requires long-lived assets to be 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.
When assets are retired or disposed of, the cost and
associated accumulated depreciation are removed from the
related accounts and the difference, net of proceeds, is recorded
as a gain or loss in Other income.
(f) Financial Services — Securities Available for Sale, at
fair value: These securities are held to meet long-term investment
objectives and are accounted for as available for sale,
carried at fair values and recorded on a trade-date basis. This
portfolio is hedged using interest rate, foreign exchange, commod-
ity and equity derivatives. The market risk associated with such
hedges is managed on a portfolio basis, with third-party hedging
transactions executed as necessary. Because hedge accounting
treatment is not achieved in accordance with FAS 133, ‘‘Accounting
for Derivative Instruments and Hedging Activities’’ (FAS 133),
the unrealized gains and losses on these securities resulting from
changes in interest rates, currency rates and equity prices are
recorded in Accumulated other comprehensive income (loss) in
consolidated shareholders’ equity while the unrealized gains and
losses on the hedging instruments are reflected in Other income.
(g) Financial Services — Trading Securities, at fair value:
Trading securities are held to meet short-term investment objec-
tives and to economically hedge other securities. Trading securi-
ties are recorded on a trade-date basis and carried at fair value.
Realized and unrealized gains and losses are reflected in Other
income.
(h) Financial Services — Spot Commodities: Spot commodities
held in AIGFP’s wholly owned broker-dealer subsidiary are
recorded at fair value. All other commodities are recorded at the
lower of cost or fair value. Spot commodities are recorded on a
trade-date basis. The exposure to market risk may be reduced
through the use of forwards, futures and option contracts. Lower
of cost or fair value reductions in commodity positions and
unrealized gains and losses in related derivatives are reflected in
Other income.
(i) Financial Services — Unrealized Gain and Unrealized
Loss on Swaps, Options and Forward Transactions: Inter-
est rate, currency, equity and commodity swaps (including AIGFP’s
super senior credit default swap portfolio), swaptions, options and
forward transactions are accounted for as derivatives recorded on
a trade-date basis, and carried at fair value. Unrealized gains and
losses are reflected in income, when appropriate. In certain
instances, when income is not recognized at inception of the
contract under EITF 02-3, income is recognized over the life of the
contract and as observable market data becomes available.
(j) Financial Services — Trade Receivables and Trade Payables:
Trade receivables and Trade payables include option
premiums paid and received and receivables from and payables to
counterparties that relate to unrealized gains and losses on
futures, forwards, and options and balances due from and due to
clearing brokers and exchanges.
(k) Financial Services — Securities Purchased (Sold)
Under Agreements to Resell (Repurchase), at contract
value: Securities purchased under agreements to resell and
Securities sold under agreements to repurchase are accounted for
as collateralized borrowing or lending transactions and are
recorded at their contracted resale or repurchase amounts, plus
accrued interest. AIG’s policy is to take possession of or obtain a
security interest in securities purchased under agreements to
resell.
AIG minimizes the credit risk that counterparties to transac-
tions might be unable to fulfill their contractual obligations by
monitoring customer credit exposure and collateral value and
generally requiring additional collateral to be deposited with AIG
when necessary.
(l) Financial Services — Finance Receivables: Finance re-
ceivables, 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 expense and is maintained at a level considered
adequate to absorb estimated 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.
AIG 2007 Form 10-K 141