American Express 2003 Annual Report Download - page 82

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variable universal life insurance are recognized as revenue when earned, whereas contract charges and surrender charges
on universal and variable universal life insurance and annuities are recognized as revenue when collected.
Other
Other revenues include fees from financial planning, consulting and business services and miscellaneous investment income.
Marketing, Promotion, Rewards and Cardmember Services
The Company expenses advertising costs in the year in which the advertising first takes place.
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 part-
ners 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 that are ultimately expected to be redeemed
by cardmembers 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 enroll-
ment 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 with respect to redemptions.
Cash and Cash Equivalents
At both December 31, 2003 and 2002, cash and cash equivalents included $1.1 billion segregated in special bank accounts
for the benefit of customers. The Company has defined cash equivalents to include time deposits with original maturities of
90 days or less. The Company classifies restricted cash totaling $1.3 billion and $0.5 billion at December 31, 2003 and 2002,
respectively, as other assets in cases where cash cannot be utilized for operations.
Reserves for Cardmember Credit Losses
The Company’s reserves for credit losses relating to cardmember loans and receivables represent management’s estimate
of the amount necessary to absorb future credit losses inherent in the Company’s outstanding portfolio of loans and receiv-
ables. Management’s evaluation process requires many estimates and judgments. Reserves for these credit losses are pri-
marily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management’s
judgment regarding overall adequacy. The analytic models take into account several 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 and average bank-
ruptcy and recovery rates. In exercising its judgment to adjust reserves that are calculated by the analytic model, man-
agement considers the level of coverage of past-due accounts, as well as 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 management deems amounts to be uncollectible, which is generally determined by the num-
ber of days past due. In general, bankruptcy and deceased accounts are written-off upon notification, or when 180 days
past due for lending products and 360 days past due for charge card products. For all other accounts, write-off policy is
based upon the delinquency and product. 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 applicable.
Investments
Generally, investment securities are carried at fair value on the balance sheet with unrealized gains (losses) recorded in
equity, net of income tax provisions (benefits). Gains and losses are recognized in results of operations upon disposition of
the securities. In addition, losses are also recognized when management determines that a decline in value is other-than-
temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary
(p.80_axp_ notes to consolidated financial statements)