2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
1. Summary of Significant Accounting Policies
Continued
Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction’’ (FSP 13-2). FSP
13-2 addresses how a change or projected change in the timing of
cash flows relating to income taxes generated by a leveraged
lease transaction affects the accounting for the lease by the
lessor, and directs that the tax assumptions be consistent with
any FIN 48 uncertain tax position related to the lease. AIG
adopted FSP 13-2 on January 1, 2007. Upon adoption, AIG
recorded a $50 million decrease in the opening balance of
retained earnings, net of tax, to reflect the cumulative effect of
this change in accounting.
As a result of adopting SOP 05-1, FIN 48 and FSP 13-2, AIG
recorded a total decrease to opening retained earnings of
$203 million as of January 1, 2007.
also establishes presentation and disclosure requirements for
similar types of assets and liabilities measured at fair value.
FAS 159 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 an
event that gives rise to a new basis of accounting for that
instrument.
AIG adopted FAS 159 on January 1, 2008, its required
effective date. The adoption of FAS 159 with respect to elections
made in the Life Insurance & Retirement Services segment is
expected to result in a decrease to opening 2008 retained
earnings of approximately $600 million. The adoption of FAS 159
with respect to elections made by AIGFP is currently being
evaluated for the effect of recently issued draft guidance by the
FASB, anticipated to be issued in final form in early 2008, and its
potential effect on AIG’s consolidated financial statements.
SOP 07-1
Future Application of Accounting Standards In June 2007, the AICPA issued SOP No. 07-1 (SOP 07-1),
FAS 157
‘‘Clarification of the Scope of the Audit and Accounting Guide ‘Audits
of Investment Companies’ and Accounting by Parent Companies and
In September 2006, the FASB issued FAS 157, ‘‘Fair Value
Equity Method Investors for Investments in Investment Companies.’’
Measurements’’ (FAS 157). FAS 157 defines fair value, estab- SOP 07-1 amends the guidance for whether an entity may apply the
lishes a framework for measuring fair value and expands disclo- Audit and Accounting Guide, ‘‘Audits of Investment Companies’’ (the
sure requirements regarding fair value measurements but does Guide). In February 2008, the FASB issued an FSP indefinitely
not change existing guidance about whether an instrument is deferring the effective date of SOP 07-1.
carried at fair value. FAS 157 nullifies the guidance in EITF 02-3
that precluded the recognition of a trading profit at the inception
of a derivative contract unless the fair value of such contract was
FAS 141(R)
obtained from a quoted market price or other valuation technique In December 2007, the FASB issued FAS 141 (revised 2007),
incorporating observable market data. FAS 157 also clarifies that ‘‘Business Combinations’’ (FAS 141(R)). FAS 141(R) changes the
an issuer’s credit standing should be considered when measuring accounting for business combinations in a number of ways,
liabilities at fair value.
including broadening the transactions or events that are consid-
AIG adopted FAS 157 on January 1, 2008, its required
ered business combinations, requiring an acquirer to recognize
effective date. FAS 157 must be applied prospectively, except that 100 percent of the fair values of assets acquired, liabilities
the difference between the carrying amount and fair value of a assumed, and noncontrolling interests in acquisitions of less than
stand-alone derivative or hybrid instrument measured using the a 100 percent controlling interest when the acquisition constitutes
guidance in EITF 02-3 on recognition of a trading profit at the a change in control of the acquired entity, recognizing contingent
inception of a derivative, is to be applied as a cumulative-effect consideration arrangements at their acquisition-date fair values
adjustment to opening retained earnings on January 1, 2008. The with subsequent changes in fair value generally reflected in
adoption of FAS 157 was not material to AIG’s financial condition. income, and recognizing preacquisition loss and gain contingen-
However, the adoption of FAS 157 is expected to affect first cies at their acquisition-date fair values, among other changes.
quarter 2008 earnings, due to changes in the valuation methodoltions
FAS 141(R) is required to be adopted for business combina-
ogy for hybrid financial instrument and derivative liabilities (both
for which the acquisition date is on or after the beginning of
freestanding and embedded) currently carried at fair value. These the first annual reporting period beginning on or after Decem-
methodology changes primarily include the incorporation of AIG’s ber 15, 2008 (January 1, 2009 for AIG). Early adoption is
own credit risk and the inclusion of explicit risk margins, where prohibited. AIG is evaluating the effect FAS 141(R) will have on its
appropriate.
consolidated financial statements.
FAS 159 FAS 160
In February 2007, the FASB issued FAS 159, ‘‘The Fair Value
Option for Financial Assets and Financial Liabilities’’ (FAS 159).
FAS 159 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. FAS 159
In December 2007, the FASB issued FAS 160, ‘‘Noncontrolling
Interests in Consolidated Financial Statements, an amendment of
ARB No. 51’’ (FAS 160). FAS 160 requires noncontrolling (i.e.,
minority) interests in partially owned consolidated subsidiaries to
be classified in the consolidated balance sheet as a separate
component of consolidated shareholders’ equity. FAS 160 also
146 AIG 2007 Form 10-K