American Express 2004 Annual Report Download - page 85

as outlined under accounting principles generally
accepted in the United States (GAAP).
All significant intercompany transactions are eliminated.
Certain reclassifications of prior period amounts have
been made to conform to the current presentation.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies
are translated into U.S. dollars based upon exchange
rates prevailing at the end of each year. The resulting
translation adjustments, along with any related hedge
and tax effects, are included in accumulated other com-
prehensive income (loss), a component of sharehold-
ers’ equity. Revenues and expenses are translated at the
average month end exchange rates during the year.
Gains and losses related to non-functional currency
transactions, including non-U.S. operations where the
functional currency is the U.S. dollar, are reported net
in other revenue in the Company’s Consolidated State-
ments of Income.
Amounts Based on Estimates and Assumptions
Accounting estimates are an integral part of the Consoli-
dated Financial Statements. In part, they are based upon
assumptions concerning future events. Among the more
significant assumptions are those that relate to reserves
for cardmember credit losses, asset securitizations,
Membership Rewards, financial instruments valuation
and deferred acquisition costs as discussed in detail
below. These accounting estimates reflect the best judg-
ment 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 includ-
ing airline, hotel and rental car reservations; and a
wide range of investment, savings, lending and insur-
ance products.
Discount revenue
The Company earns discount revenue from fees
charged to service establishments with whom the Com-
pany has entered into card acceptance agreements for
processing cardmember transactions. The discount is
generally 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 gener-
ally 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 on investments
(other than trading securities) are recognized using the
specific identification method on a trade date basis and
charges are recorded when securities are determined to
be other-than-temporarily impaired.
Investment income for the Company’s international
banking and other loans is accrued on unpaid principal
balances in accordance with the terms of the loans
unless collection of interest is in doubt, in which case
interest income is recognized only to the extent it is
received in cash. Generally, the accrual of interest on
these loans and advances is discontinued at the time
the loan is 90 days delinquent, depending on loan type,
or when an impairment is determined. When there is
doubt regarding the ultimate collectibility of outstand-
ing balances, all cash received is applied to reduce the
carrying value of the loan or advance. Fees and
deferred acquisition costs are amortized over the life of
the loan or advance using the effective interest method.
Net investment income is presented net of interest
expense of $221 million, $218 million and $240 million
for 2004, 2003 and 2002, respectively, related primarily
to the Company’s international banking operations.
Management and distribution fees
Management fees relate primarily to managed assets
for proprietary mutual funds and separate account
assets, as well as employee benefit plan and institu-
tional investment management and administration ser-
vices. They are primarily based on the underlying asset
values which are accrued daily and generally collected
monthly. Many of the proprietary mutual funds have a
performance incentive adjustment (PIA). This PIA
adjusts the level of management fees received based on
the specific fund’s relative performance as measured
against a designated external index. PIA fee revenue is
recognized when the experience period has ended.
Distribution fees primarily include point-of-sale fees
(i.e., front-load mutual fund fees) and asset-based
fees (i.e., 12b-1 fees and wrap account fees) that are
generally based on a contractual fee as a percentage of
assets and recognized when received.
Cardmember lending net finance charge revenue
Cardmember lending finance charges are assessed
using the average daily balance method for receivables
owned and are recognized based upon the principal
amount outstanding in accordance with the terms of
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AR.04
83
Notes to Consolidated Financial Statements