American Express 2005 Annual Report Download - page 71

$552 million at December 31, 2005 and 2004,
respectively, in other assets in cases where cash cannot
be utilized for operations.
Accounts receivable
Cardmember receivables
Cardmember receivables represent amounts due from
charge card customers and are recorded at the time that
a cardmember enters into a point-of-sale transaction at
a service establishment. Cardmember receivable bal-
ances are presented on the balance sheet net of reserves
for losses, which are discussed below, and typically
include principal and any related accrued fees.
Reserves for losses — cardmember receivables
The Company’s reserves for losses relating to cardmember
receivables represent management’s estimate of the
incurred losses inherent in the Company’s outstanding
portfolio of receivables. Management’s evaluation process
requires certain estimates and judgments. Reserves for
these losses are primarily based upon models that analyze
specific portfolio statistics and also reflect, to a lesser
extent, management’s judgment regarding overall
adequacy. The analytic models take into account several
factors, including average write-off rates for various stages
of receivable aging (i.e., current, 30 days, 60 days, 90 days)
over a 24-month period and average bankruptcy and
recovery rates. Management considers whether adjust-
ments to the analytic models are necessary based on other
factors such as the level of coverage of past-due accounts,
as well as external indicators, such as leading economic
indicators, unemployment rate, consumer confidence
index, purchasing manager’s index, bankruptcy filings and
the legal and regulatory environment. Cardmember receiv-
able balances are written-off when management deems
amounts to be uncollectible, which is generally deter-
mined by the number of days past due. In general, bank-
ruptcy and deceased accounts are written-off upon notifi-
cation, while other accounts are written-off when 360 days
past due. To the extent historical credit experience is not
indicative of future performance or other assumptions
used by management do not prevail, actual loss experience
could differ significantly, resulting in either higher or lower
future provisions for losses, as applicable.
Investments
Available-for-Sale investment securities are carried at
fair value on the balance sheet with unrealized gains
(losses) recorded in equity, net of income tax provisions
(benefits). Gains and losses are recognized in results of
operations upon disposition of the securities. Gains and
losses on investments (other than trading securities)
are recognized using the specific identification method
on a trade date basis. In addition, realized losses are
also recognized when management determines that a
decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery.
Indicators of other-than-temporary impairment for debt
securities include issuer downgrade, default or bank-
ruptcy. The Company also considers the extent to which
cost exceeds fair value, the duration and size of that gap,
and management’s judgment about the issuer’s current
and prospective financial condition. Fair value is gener-
ally based on quoted market prices. Trading investments
are carried at fair value on the balance sheet with the
changes in fair value recorded in results of operations.
Loans
Cardmember lending
Cardmember loans represent amounts due from cus-
tomers of the Company’s lending products, and are
recorded at the time that a cardmember enters into a
point-of-sale transaction at a service establishment.
These loans are presented on the balance sheet net of
reserves for cardmember losses, which are explained
further below, and include accrued interest receivable
and fees as of the balance sheet date. Additionally,
cardmember loans include balances with extended pay-
ment terms on certain charge card products. The Com-
pany’s policy is to cease accruing for interest receivable
once a related cardmember loan is greater than 180 days
past due.
Reserve for losses — cardmember lending
The Company’s reserves for losses relating to card-
member loans represent management’s estimate of the
incurred losses inherent in the Company’s outstanding
loan portfolio. Management’s evaluation process requires
certain estimates and judgments. Reserves for these losses
are primarily based upon models that analyze specific
portfolio statistics and also reflect, to a lesser extent, man-
agement’s judgment regarding overall adequacy. The ana-
lytic models take into account several factors, including
average write-off rates for various stages of receivable
aging (i.e., current, 30 days, 60 days, 90 days) over a
24-month period and average bankruptcy and recovery
rates. Management considers whether adjustments to the
analytic model are necessary based on other factors such
as the level of coverage of past-due accounts, as well as
external indicators, such as leading economic indicators,
unemployment rate, consumer confidence index,
purchasing manager’s index, bankruptcy filings and the
legal and regulatory environment. Notes to Consolidated
Financial Statements
AXP / AR.2005
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