American Express 2003 Annual Report Download - page 86

Download and view the complete annual report

Please find page 86 of the 2003 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

accounting for an additional $28 million in rated CDO tranches or a $27 million minority-owned SLT, both of which are
managed by third parties, and also did not impact the accounting for $16 million of CDO residual tranches managed by
the Company or $422 million of affordable housing partnerships as the Company is not the primary beneficiary. The
Company’s maximum exposure to loss as a result of its investment in these entities is represented by the carrying values.
The CDO consolidated as a result of FIN 46 contains debt issued to investors that is non-recourse to the Company and
solely supported by a portfolio of high-yield bonds and loans. AEFA manages the portfolio of high-yield bonds and loans
for the benefit of CDO debt held by investors and retains an interest in the residual and rated debt tranches of the CDO
structure. The SLTs consolidated as a result of FIN 46 provide returns to investors primarily based on the performance of
an underlying portfolio of high-yield loans which are managed by AEFA.
The consolidation of FIN 46-related entities resulted in a cumulative effect of accounting change that reduced 2003 net
income through a non-cash charge of $13 million ($20 million pretax). The net charge was comprised of a $57 million
($88 million pretax) non-cash charge related to the consolidated CDO offset by a $44 million ($68 million pretax) non-
cash gain related to the consolidated SLTs. In addition, the consolidation of these VIEs resulted in the elimination of the
Company’s investment in the applicable VIEs, which was nil for the CDO and $673 million for the SLTs. The Company con-
solidated new assets of $1.2 billion ($844 million of cash, $244 million of below investment grade securities classified as
Available-for-Sale (including net unrealized appreciation and depreciation), $64 million of derivatives and $15 million of
loans and other assets, essentially all of which are restricted), liabilities of $500 million ($325 million of debt and $175 mil-
lion of other liabilities, both of which are non-recourse to the Company) and $9 million of net unrealized after-tax appre-
ciation on securities classified as Available-for-Sale. Taken together over the lives of the structures through their maturity,
the Company’s maximum cumulative exposure to pretax loss as a result of its investment in these entities is represented by
the carrying values prior to adoption of FIN 46, which were nil and $673 million for the CDO and SLTs, respectively, as
well as the $68 million pretax non-cash gain recorded upon consolidation of the SLTs.
The initial charge related to the application of FIN 46 for the CDO and SLTs had no cash flow effect on the Company. Ongo-
ing valuation adjustments specifically related to the application of FIN 46 to the CDO are also non-cash items and will be
reflected in the Company’s results until their maturity. Subsequent to the December 31, 2003 FIN 46 adoption, these ongo-
ing valuation adjustments, which will be reflected in operating results over the remaining lives of the structure subject to
FIN 46 and which will be dependent upon market factors during such time, will result in periodic gains or losses. The Com-
pany expects, in the aggregate, such gains or losses related to the CDO, including the December 31, 2003 implementation
charge, to reverse themselves over time as the structure matures, because the debt issued to the investors in the CDO is non-
recourse to the Company, and further reductions in the value of the related assets will be absorbed by the third-party
investors. To the extent losses are incurred in the SLT portfolio, charges could be incurred which may or may not be reversed.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activ-
ities.” The Statement amends and clarifies accounting for derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. The adoption of this Statement did not have a material impact on the Company’s
financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.” The Statement establishes standards for how an issuer classifies and measures certain financial instru-
ments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within
its scope as a liability; many of those instruments were previously classified as equity. The adoption of this Statement did
not have a material impact on the Company’s financial statements.
(p.84_axp_ notes to consolidated financial statements)