AIG's Annual Report

One of the many large issues swirling around the AIG case is the treatment of compensation expense paid to key AIG executives by Starr International. Starr was set up by key AIG executives when the company first went public and is basically a holding company for AIG stock, the company holds about 12% of AIG's stock. The accounting issue is that Starr provides current key AIG executives shares of Starr and AIG does not recognize any expense on its income statement. From yesterday's WSJ on AIG:

Here is why AIG's prior accounting treatment looks questionable to some accounting specialists: Under the accounting rules for stock compensation, if a principal stockholder of a company establishes a stock plan to pay that company's employees, the company must account for the payments as an expense on its own income statement.

The rules define a principal stockholder as one that either owns 10% or more of a company's common stock or has the ability to exert significant influence over a company's affairs, directly or indirectly.

It seems pretty straightforward that AIG should have recognized compensation expense related to the Starr compensation, why the company didn't is a mystery, however the information was disclosed. here is the footnote from the 2003 annual report (footnote 16):

16. STARR INTERNATIONAL COMPANY, INC. PLAN Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG.
Participation in the SICO Plan by any person, and the amount of such participation, is at the sole discretion of SICO's Board of Directors, and none of the costs of the various benefits provided under such plan is paid by or charged to AIG. The SICO Plan provides that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early pay-out of units under certain circumstances. Prior to pay-out, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant's voluntary termination of employment with AIG prior to normal retirement age. In addition, SICO's Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock. If the expenses of the SICO Plan had been reflected by AIG, the pre-tax amounts accrued would have been $49.4 million, $55.7 million and $76.8 million for 2002, 2001 and 2000, respectively.