American Express 2004 Annual Report Download - page 86

the applicable account agreement until the outstanding
balance is paid or written-off. Cardmember lending net
finance charge revenue is presented net of interest
expense of $571 million, $483 million and $510 million
for 2004, 2003 and 2002, respectively.
Net card fees
Card fees are recognized as revenue over the card
membership period covered by the card fee, net of
provision for projected refunds of card fees for can-
cellation of card membership. Similarly, deferred
card acquisition costs are amortized into operating
expenses over the card membership period covered
by the card fee.
Travel commissions and fees
Customer revenue is earned by charging a transaction
or management fee for airline or other transactions
based on contractual agreements with travel clients.
Customer-related fees and other revenues are recog-
nized at the time a client books travel arrangements.
Travel suppliers pay commissions on airline tickets
issued and on sales and transaction volumes, based on
contractual agreements. These revenues are recog-
nized at the time a ticket is purchased. Other travel sup-
pliers that pay commissions on hotels and car rentals
are generally not under firm contractual agreements,
and, therefore, revenue is recognized when cash
is received.
Other commissions and fees
Other commissions and fees include foreign exchange
conversion fees and other card-related assessments,
which are primarily recognized in the period charged
to the cardmember. Fees related to the Company’s
Membership Rewards program are recognized over the
period covered by the fee.
Insurance and annuity revenues
Insurance and annuity revenues include premiums on
traditional life, disability income, long-term care and
property-casualty insurance and certain charges
assessed on universal and variable universal life insur-
ance and annuities. Premiums on traditional life,
disability income and long-term care insurance are rec-
ognized as revenue when due, whereas premiums on
property-casualty insurance are recognized ratably
over the coverage period. Cost of insurance charges
on universal and variable universal life insurance are
recognized as revenue when earned, whereas contract
charges and surrender charges on universal and vari-
able universal life insurance and annuities are recog-
nized as revenue when collected.
Securitization income, net
Net securitization income includes non-credit provision
components of the net gains and charges from securiti-
zation activities, related impairment charges, if any, of
the related interest-only strip, excess spread related to
securitized cardmember loans, net finance charge rev-
enue on retained interests in securitized cardmember
loans and servicing income, net of related discounts or
fees. Excess spread represents the net positive cash flow
from interest and fees collected from the securitized
cardmember loans allocated to securities sold to third-
party investors after deducting the interest paid on
investor securities, credit losses, contractual servicing
fees and other expenses. See Note 4 for further informa-
tion regarding securitizations.
Other
Other revenues primarily include fees from financial
planning, consulting and business services, which are
recognized as services are performed.
Expenses
Stock-based compensation
At December 31, 2004, the Company has two stock-
based employee compensation plans, which are
described more fully in Note 15. Effective January 1,
2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation,” prospectively for all stock
options granted after December 31, 2002. The fair value
of each option is estimated on the date of grant using
a Black-Scholes option-pricing model. Prior to 2003,
the Company accounted for those plans under the rec-
ognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related Interpre-
tations. Prior to the adoption of the fair value recogni-
tion provisions of SFAS No. 123 in 2003, no employee
compensation expense was recorded in net income for
stock options granted, since all options granted under
these plans had an exercise price equal to the market
value of the underlying common stock on the date
of grant. For the years ended December 31, 2004
and 2003, the Company expensed $83 million and
$37 million pretax, respectively, related to stock
options granted January 1, 2003 or later.
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition
and Disclosure,” which amended APB Opinion No. 28,
“Interim Financial Reporting,” to require disclosure about
the pro forma effects of SFAS No. 123 on reported net
income of stock-based compensation accounted for
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Notes to Consolidated Financial Statements