American Express 2002 Annual Report Download - page 64

I62 AXP INOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provision adjust once every six years. The periodic adjustment of these contracts can either increase or decrease the guaranteed
amount though not below the amount invested adjusted for withdrawals. When market values of the customer’s accounts
decline, the death benefit payable on a contract with a GMDB may exceed the accumulated contract value. Currently, the
amount paid in excess of contract value is expensed when payable. Amounts expensed in 2002, 2001 and 2000 were $37 million,
$16 million and $1 million, respectively.
Membership Rewards
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
redemtpion 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.
Stock Options
At December 31, 2002, the company has two stock-based employee compensation plans, which are described in more detail in
Note 14. Effective January 1, 2003, the company has adopted the fair value recognition provisions of SFAS No. 123, “Account-
ing for Stock-Based Compensation,” prospectively for all stock options granted after January 1, 2003. Prior to 2003, the
company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opin-
ion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No employee compensation cost is
reflected in net income for stock options granted, since all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and
EPS assuming the company had followed the fair value recognition provisions of SFAS No. 123 for stock options for the years
ended December 31, 2002, 2001 and 2000.
(Millions, except per share amounts) 2002 2001 2000
Net income:
As reported $ 2,671 $ 1,311 $ 2,810
Deduct: Total stock option employee compensation
expense determined under fair value based method,
net of related tax effects (329) (237) (194)
Pro forma $ 2,342 $ 1,074 $ 2,616
Basic EPS:
As reported $2.02 $ 0.99 $ 2.12
Pro forma $1.77 $ 0.81 $ 1.97
Diluted EPS:
As reported $2.01 $ 0.98 $ 2.07
Pro forma $1.76 $ 0.80 $ 1.92
Recently Issued Accounting Standards
Effective January 1, 2002, the company adopted 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 has completed goodwill impairment tests as of the date of initial adoption, and again during 2002. Such tests did
not indicate impairment. See Note 5 for further discussion of the company’s goodwill and other intangibles.