American Express 2005 Annual Report Download - page 70

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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 are amortized
over the life of the loan or advance using the effective
interest method. Other investment income and interest
income is presented net of interest expense of $321 mil-
lion, $220 million and $216 million for 2005, 2004 and
2003, respectively, related primarily to the Company’s
international banking operations.
Expenses
Stock-based compensation
Effective July 1, 2005, the Company adopted SFAS No.
123 (revised 2004), “Share-Based Payment (SFAS No.
123(R)),” using the modified prospective application.
SFAS No. 123(R) requires entities to measure and rec-
ognize the cost of employee services received in
exchange for an award of equity instruments based on
the grant-date fair value of the award and applies to (i)
new awards, (ii) awards modified, repurchased, or can-
celled after the adoption date, and (iii) any outstanding
awards accounted for under APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” for which
all requisite service has not yet been rendered. The
adoption of SFAS No. 123(R) did not have a material
impact on the Company’s financial statements since the
Company has been expensing share based awards
granted after January 1, 2003 under the provisions of
SFAS No. 123, “Accounting for Stock-Based Compen-
sation” (SFAS No. 123). The Company recognizes the
cost of these awards on a straight line basis over their
vesting periods. Also, SFAS No. 123(R) requires compa-
nies to calculate the pool of income tax benefits that
were previously recorded in additional paid-in capital
and are available to absorb future income tax benefit
deficiencies that can result from the exercise or maturity
of stock awards. The Company has calculated its pool
based on the actual income tax benefits received from
exercises and maturities of stock awards granted after
the effective date of SFAS No. 123, January 1, 1995.
The following table illustrates the effect on net income
and earnings per common share (EPS) assuming the
Company had followed the fair value recognition
provisions of SFAS No. 123(R) for all outstanding and
unvested stock options and other stock-based compen-
sation for the three years ended December 31, 2005:
(Millions, except per share amounts) 2005 2004 2003
Net income as reported $ 3,734 $ 3,445 $ 2,987
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects
(a)
207 184 113
Deduct: Total stock-based employee compensation expense determined under
fair value based method, net of related tax effects
(a)
(216) (368) (383)
Pro forma net income $ 3,725 $ 3,261 $ 2,717
Basic EPS:
As reported $ 3.03 $ 2.74 $ 2.33
Pro forma $ 3.02 $ 2.59 $ 2.12
Diluted EPS:
As reported $ 2.97 $ 2.68 $ 2.30
Pro forma $ 2.96 $ 2.54 $ 2.09
(a)Includes amounts related to discontinued operations.
Marketing, promotion, rewards and
cardmember services
These expenses include the costs of rewards programs
(including Membership Rewards which is discussed fur-
ther in the other liabilities section), protection plans and
complimentary services provided to cardmembers,
except that cash paid to cardmembers under cash-back
programs is recorded as a reduction to revenues. These
expenses also include advertising costs which are
expensed in the year in which the advertising first
takes place.
Balance Sheet
Cash and cash equivalents
The Company has defined cash equivalents to include
time deposits and other highly liquid investments with
original maturities of 90 days or less. The Company
classified restricted cash totaling $451 million and
Notes to Consolidated
Financial Statements
AXP / AR.2005
[68 ]