American Express 2003 Annual Report Download - page 80

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(p.78_axp_ 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, its subsidiaries
and certain variable interest entities (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
As of December 31, 2003, pursuant to the Company’s adoption of Financial Accounting Standards Board (FASB) Interpre-
tation No. 46, “Consolidation of Variable Interest Entities,” as revised, the Company consolidates all variable interest
entities for which it is considered to be the primary beneficiary. In addition, the Company consolidates all entities in
which it holds a greater than 50% interest, except for immaterial seed money investments in mutual and hedge funds. Enti-
ties 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 (QSPEs) under Statement of Financial Accounting Standards (SFAS) No. 140, “Account-
ing for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are not consolidated. Such QSPEs
include those that the Company utilizes in connection with cardmember lending securitizations at the Travel Related Ser-
vices (TRS) segment, as well as a securitization trust containing a majority of the Company’s rated collateralized debt obli-
gations (CDOs) described in Note 2. Other entities 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 other
entities where the Company has an interest, is the sponsor or transferor. See Recently Issued Accounting Standards section
below for further information regarding consolidation of such entities. Additionally, the Company has securitized charge
card receivables totaling $3.0 billion and $5.1 billion as of December 31, 2003 and 2002, 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; likewise, an equal amount of debt is included in long-term debt.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consolidated Financial Statements. In part, they are based upon assump-
tions 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 as discussed in
detail below. 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 the payment to
the service establishment and recorded as discount revenue at the time the charge is captured.
Net investment income
Investment 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 payments, so that the related loan or security recognizes a constant rate of return on the outstanding balance