AIG's Tricky Accounting Question

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Investors have been waiting for nearly a year to see American International Group's (NYSE: AIG  ) sale of its International Lease Finance Corp. to a Chinese consortium get to the finish line. But ever since the deal was inked last December, there has been one complication after another. During the insurer's most recent earnings conference call, CEO Robert Benmosche noted that there were some new accounting concerns putting pressure on the firm to make a decision during the fourth quarter regarding ILFC's sale or IPO.

Here's the scoop on AIG's latest dilemma.

No news was good news
The most recent developments in the sale of ILFC to the Chinese consortium will require some more time to resolve, which AIG might not have if it wants to keep the operations off its balance sheet. Since the company entered into the deal with the consortium, ILFC has been listed as a non-core asset that's being held for sale, and as such, it is held to certain accounting requirements. With the newest changes to the consortium, AIG needs to re-evaluate whether ILFC still meets those accounting requirements.

Requirement 1: Available immediately
ILFC easily met the first hurdle. AIG has the operations available for immediate sale, as-is. Check.

Requirement 2: Sale is "highly probable"
This test may trip up the accountants a bit. The general rule states that there needs to be a market for the sale of the asset, including reasonable pricing and buyers.

The pricing aspect was disappointing for AIG's management, but it was met when the deal was signed at $4.2 billion. Initially, the insurer was looking to sell ILFC for close to $9 billion. Subsequently, ILFC's recent impairment didn't affect AIG, since the company had already taken a writedown on the fair value of the operations to match its sale price.

The second part of the requirement is where the complications arise. The consortium is having difficulties with members leaving and new parties stepping forward, as well as financing. This will cause AIG to evaluate carefully whether the consortium represents true available buyers.

Requirement 3: Timing
When an asset is classified as held for sale, there is generally a one-year time limit automatically triggered. The company needs to have reasonable confidence that a sale of the asset will be completed within the one-year time frame.

It's this requirement that has placed some pressure on AIG's management to get the ILFC transaction resolved one way or the other during the fourth quarter. Though accounting rules do incorporate allowances for extensions resulting from unforeseen circumstances, the difficulties faced by the group of buyers, on top of the continued missed deadlines, must be making life just a little bit harder for the company's accountants to justify.

Tricky, tricky
The sale of ILFC has been a tough puzzle for AIG. And with the leasing company representing the last huge chunk of debt obligations for the insurer, it's critical to the firm's restructuring program to divest as quickly as possible. With time running out before the end of 2013, AIG's management has some tough choices ahead of it. I've already voiced my opinion, but maybe playing some of Run-DMC's "It's Tricky" in the background will inspire the accountants enough to give the consortium the time in needs to seal the ILFC deal.

Ownership is a big deal
Though ILFC is the world's second-largest aircraft leasing business, AIG recognized that owning it takes away from the company's core operations. But as every savvy investor knows, the best investors don't make billions by betting on half-baked stocks. By isolating a few best ideas, betting big, and riding them to riches (i.e., hardly ever selling), they set an easy course to financial security. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

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  • Report this Comment On November 26, 2013, at 10:38 AM, traderyen96 wrote:

    There is another accounting question that is interesting. In Q4 2012 Sandy cost AIG 4.4 billion and AIG still made $.20/share in operating earnings. It is a reasonable assumption that AIG will have reserved a similar amount for 2013 for a hurricane(s) that did not occur. From an accounting point of view, does AIG have to report all of this as earnings? Do they report half of it and reserve the rest for extra hurricane(s) next year? or did thay have a reserve for exceptional losses that was depleted that they must refill? I guess the question is the following: AIG must have reserved a considerable amount of money for hurricanes that did not occur - will they show as earnings and will these numbers effect the combined ratio of the P&C group enough that they go into the black? It can be assumed that AIG did not add any of this money into Q3 as they hurricane season was not over yet. Is there any accounting rules that govern this issue?

  • Report this Comment On November 26, 2013, at 11:06 AM, traderyen96 wrote:

    Correction - Sandy "only" cost AIG $1.3 billion in Q4 2012 - the rest of the charge was the ILFC write down (4.4 billion). However, even an extra $1.3 billion operating income in the quarter would be welcome.

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