American Express 2002 Annual Report Download - page 31

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I29 AXP IFINANCIAL REVIEW
Effective January 1, 2002, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and
Other Intangible Assets,” which established new accounting and reporting standards for goodwill and other intangible assets.
Under the new rules, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but are
instead subject to annual impairment tests. Management completed goodwill impairment tests as of the date of initial adoption
and again during 2002. Such tests did not indicate impairment.
The following table presents the impact to net income and EPS of goodwill amortization for the year ended December 31, 2001:
(Millions, except per share amounts) Net Income Basic EPS Diluted EPS
Reported $ 1,311 $ 0.99 $ 0.98
Add back: Goodwill amortization (after-tax) $ 82 $ 0.06 $ 0.06
Adjusted $ 1,393 $ 1.05 $ 1.04
Looking forward in 2003, the company expects continued uncertainty in the economy and financial markets. In addition, the
prospect of war and other geopolitical uncertainty could have a negative impact on the economy, consumer confidence and the
company’s results.
Certain Critical Accounting Policies
The company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The following
provides information about certain critical accounting policies that are important to the Consolidated Financial Statements
and that involve estimates requiring significant management assumptions and judgments about the effect of matters that are
uncertain. These policies relate to reserves for cardmember credit losses, Membership Rewards costs, investment securities
valuation and deferred acquisition costs.
Provisions for credit losses
Provisions for credit losses related to cardmember loans and receivables is one of the largest operating expenses of the company.
The company’s reserves for credit losses represent management’s estimate of the amount necessary to absorb future credit
losses inherent in the company’s outstanding portfolio of loans and receivables. Management’s evaluation process requires
numerous estimates and judgments. Reserves for these credit losses are primarily based upon models which analyze portfolio
statistics and management’s judgment. The analytic models take into account numerous factors, including average write-off
rates for various stages of receivable aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period, average bank-
ruptcy rates and average recovery rates. In exercising its judgment in setting reserve levels, management considers levels derived
from these models and external indicators, such as leading economic indicators, unemployment rate, consumer confidence
index, purchasing manager’s index, bankruptcy filings and the regulatory environment. Loans are charged-off when manage-
ment deems amounts to be uncollectible, which is generally determined by the number of days the amount is past due. To the
extent historical credit experience is not indicative of future performance or other assumptions used by management do not
prevail, loss experience could differ significantly, resulting in either higher or lower future provisions for credit losses, as applic-
able.
Membership Rewards costs
The company’s Membership Rewards loyalty program allows enrolled 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 its reward partners
when cardmembers redeem their points and establishes reserves to cover the cost of future reward redemptions. The provision
for the cost of Membership Rewards is based upon points awarded which are ultimately expected to be redeemed by cardmem-
bers and the current weighted average cost per point of redemption. The ultimate points to be redeemed are estimated based on
many factors, including a review of past behavior of cardmembers segmented by product, year of enrollment in the program,
spend level and duration in the program. Past behavior is used to predict when current enrollees will attrite and their ultimate
redemption rate. In addition, the cumulative balance sheet liability for unredeemed points is adjusted over time based on actual
redemption and cost experience as well as current trends with respect to redemptions. To the extent that the estimates differ
from actual experience, the company’s future Membership Rewards program cost could be higher or lower, as applicable.