American Express 2001 Annual Report Download - page 67

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axp_65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying and fair values of off-balance sheet financial instruments are not material as of December 31, 2001 and 2000. See Note
4 for carrying and fair value information regarding investments. The following methods were used to estimate the fair values of
financial assets and financial liabilities:
FINANCIAL ASSETS
Assets for which carrying values approximate fair values include cash and cash equivalents, accounts receivable and accrued
interest, separate account assets, certain other assets, and, for 2001, derivative financial instruments.
Generally, investments are carried at fair value on the Balance Sheet. Gains and losses are recognized in the results of operations
upon disposition of the securities. In addition, losses are also recognized when management determines that a decline in value is
not temporary.
For variable rate loans that reprice within a year where there has been no significant change in counterparties’ creditworthiness,
fair values are based on carrying values.
The fair values of all other loans, except those with significant credit deterioration, are estimated using discounted cash flow analy-
sis, based on current interest rates for loans with similar terms to borrowers of similar credit quality. For loans with significant
credit deterioration,fair values are based on estimates of future cash flows discounted at rates commensurate with the risk inherent
in the revised cash flow projections, or for collateral dependent loans, on collateral values.
FINANCIAL LIABILITIES
Liabilities for which carrying values approximate fair values include customers’ deposits, travelers cheques outstanding, accounts
payable, short-term debt, certain other liabilities, and, for 2001, derivative financial instruments.
Fair values of fixed annuities in deferral status are estimated as the accumulated value less applicable surrender charges and loans.
For annuities in payout status, fair value is estimated using discounted cash flows, based on current interest rates. The fair value of
these reserves excludes life insurance-related elements of $1.4 billion and $1.3 billion in 2001 and 2000, respectively.
For variable rate investment certificates that reprice within a year, fair values approximate carrying values. For other investment
certificates, fair value is estimated using discounted cash flows based on current interest rates. The valuations are reduced by the
amount of applicable surrender charges and related loans.
For variable rate long-term debt that reprices within a year, fair values approximate carrying values. For other long-term debt, fair
value is estimated using either quoted market prices or discounted cash flows based on the company’s current borrowing rates for
similar types of borrowing.
Fair values of separate account liabilities, after excluding life insurance related elements of $3.0 billion and $3.6 billion in 2001 and
2000, respectively, are estimated as the accumulated value less applicable surrender charges.