American Express 2001 Annual Report Download - page 54

axp_52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
Note 1 ❚SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements include the accounts of American Express Company and its subsidiaries
(the company). All significant intercompany transactions are eliminated.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the consolidated financial statements. In part they are based upon assumptions con-
cerning future events. Among the more significant are those which relate to reserves for Cardmember credit losses, Membership
Rewards, the recognition of other than temporary impairment within the investment portfolio (see Note 4) and the amortization
of deferred acquisition costs. These reflect the best judgment of management and actual results could differ.
REVENUES
Cardmember lending net finance charge revenue is presented net of interest expense of $953 million, $1,039 million and $674 mil-
lion for the years ended December 31,2001,2000 and 1999, respectively. Interest and dividends is presented net of interest expense
related primarily to the company’s international banking activities of $434 million, $559 million and $453 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
RESERVES FOR CREDIT LOSSES
Reserves for credit losses related to Cardmember loans and receivables are primarily based upon statistically driven models derived
from historical experience, as well as management judgment as to the business and economic environment. In determining the
reserves, management evaluates both internal credit metrics, such as migration analysis, write-off rates, recovery rates and net
write-off coverage, as well as external economic data, such as unemployment, bankruptcy filings and consumer confidence, among
other indicators that may impact the portfolios.
MEMBERSHIP REWARDS
The company’s Membership Rewards Loyalty Program allows Cardmembers to earn points that can be redeemed for a broad range
of travel rewards, retail merchandise and gourmet gifts. The company makes payments to merchants when Cardmembers redeem
their points and establishes reserves in connection with such redemptions. The provision for the cost of Membership Rewards is
based upon points awarded in the current year which are ultimately expected to be redeemed by program members and the cur-
rent average cost per point of redemption. The cumulative liability for unredeemed points is adjusted over time based on actual
experience and current trends with respect to redemptions.
DEFERRED ACQUISITION COSTS
American Express Financial Advisors’ (AEFA) deferred acquisition costs (DAC) represent costs of acquiring new business, prin-
cipally sales and other distribution and underwriting costs, that have been deferred on the sale of annuity, insurance, and certain
mutual fund and other long-term products. DACs are amortized over the lives of the products, either as a constant percentage of
projected earnings or as a constant percentage of the projected liabilities associated with such products. Such projections require
the use of certain assumptions, including interest margins, mortality rates, persistency rates, maintenance expense levels and, for
variable products, separate account performance. As actual experience differs from the current assumptions, management con-
siders on a quarterly basis the need to change key assumptions underlying the amortization models prospectively. For example, if
the stock market trend rose or declined appreciably, it could impact assumptions made about separate account performance and
result in an adjustment to income, either positively or negatively. The impact on results of operations of changing prospective
assumptions with respect to the amortization of DACs is reflected in the period in which such changes are made.