American Express 2002 Annual Report Download - page 60

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I58 AXP INOTES 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. Certain reclassifications of prior period amounts have
been made to conform to the current presentation.
Principles of Consolidation
The company consolidates all entities in which it holds a greater than 50% interest, except for immaterial seed money invest-
ments in mutual and hedge funds. Entities in which the company holds a greater than 20% but less than 50% equity interest
are accounted for under the equity method. All other investments are accounted for under the cost method unless the company
determines that it exercises significant influence over the entity by means other than voting rights.
Qualifying Special Purpose Entities (SPEs) under Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are not consolidated. Such SPEs include
those that the company utilizes in connection with asset securitizations at the Travel Related Services (TRS) segment, as well
as the securitization trust containing a majority of the company’s rated collateralized debt obligations (CDOs) described in
Note 2 of the Consolidated Financial Statements. All other SPEs are evaluated using the control, risk and reward criteria as
outlined under accounting principles generally accepted in the United States (GAAP) in determining whether to consolidate all
other SPEs where the company is the sponsor or transferor. See Recently Issued Accounting Standards below for further infor-
mation regarding consolidation of such entities. Additionally, the company has securitized charge card receivables totaling
$4.8 billion and $3.0 billion as of December 31, 2002 and 2001, respectively, which are included in cardmember receivables on
the Consolidated Balance Sheets as they do not qualify for off-balance sheet treatment under SFAS No. 140.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part they are based upon assumptions
concerning future events. Among the more significant are those that relate to reserves for cardmember credit losses,
Membership Rewards, investment securities valuation and the amortization of deferred acquisition costs. These accounting
estimates reflect the best judgment of management and actual results could differ.
Revenues
The company generates revenue from a wide range of business activities, including payment instruments such as charge and
credit cards, travel services including airline, hotel, and rental car reservations, and a wide range of investment, savings, lending
and insurance products.
Discount revenue
The company earns discount revenue from fees charged to service establishments with whom the company has entered into
card acceptance agreements for processing cardmember transactions. The discount is deducted from payment to the service
establishment and recorded as discount revenue at the time the charge is captured.
Interest and dividends, net
Interest income for the company’s performing fixed income securities and investment loans is generally accrued as earned using
the effective interest method, which makes an adjustment of the yield for security premiums and discounts, fees and other pay-
ments, so that the related loan or security recognizes a constant rate of return on the outstanding balance throughout its term.
Gains and losses are recognized on a trade date basis, and other-than-temporary impairment charges are recorded in the period
when contractual cash flows are no longer expected to be received when due.