American Express 2005 Annual Report Download - page 69

Download and view the complete annual report

Please find page 69 of the 2005 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 106

  • 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

where the functional currency is the U.S. dollar, are
reported net in other revenue or other expense, depend-
ing on the nature of the activity, in the Company’s
Consolidated Statements of Income. Net foreign cur-
rency transaction gains (losses) amounted to approxi-
mately $5 million, $(113) million and $(94) million in
2005, 2004 and 2003, respectively.
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 and
Membership Rewards 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 variety of sources
including global payments, such as charge and credit
cards, travel services and investments funded by the sale
of stored value products, including Travelers Cheques.
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 generally
deducted from the payment to the service establishment
and recorded as discount revenue at the time the charge
is captured.
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 the appli-
cable account agreement until the outstanding balance
is paid or written-off. Cardmember lending net finance
charge revenue is presented net of interest expense of
$869 million, $571 million and $483 million for 2005,
2004 and 2003, respectively.
Net card fees
Card fees are recognized as revenue over the card mem-
bership period covered by the card fee, net of provision
for projected refunds of card fees for cancellation of card
membership. Similarly, direct card acquisition costs are
deferred and 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.
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 recognized
at the time a ticket is purchased. Other travel suppliers
that pay commissions on hotels and car rentals are gen-
erally 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 Mem-
bership Rewards program are recognized over the
period covered by the fee.
Securitization income, net
Net securitization income includes non-credit provision
components of the net gains and charges from securi-
tization activities, impairment charges, if any, of the
related interest-only strip, excess spread related to secu-
ritized cardmember loans, net finance charge revenue
on retained interests in securitized cardmember loans
and servicing income, net of related discounts or fees.
Excess spread is the net positive cash flow from interest
and fee collections allocated to the third-party investors’
interests in the securitization after deducting the interest
paid on the investor certificates, credit losses, contrac-
tual servicing fees and other expenses. Excess spread is
recognized as it is earned. See Note 5 for further infor-
mation regarding securitizations.
Other investment and interest income, net
Investment income for the Company’s performing fixed
income securities is generally accrued as earned using
the effective interest method, which makes an adjust-
ment of the yield for security premiums and discounts,
fees and other payments, so that the related security rec-
ognizes a constant rate of return on the outstanding bal-
ance throughout its term.
Notes to Consolidated
Financial Statements
AXP / AR.2005
[67 ]