American Express 2005 Annual Report Download - page 72

Cardmember loans are written-off when management
deems amounts to be uncollectible, which is generally
determined by the number of days past due. In general,
bankruptcy and deceased accounts are written-off upon
notification, while other accounts are written-off when
180 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.
International banking
International banking loans primarily represent
amounts due from consumers, high net worth individu-
als, banks and other institutions, and corporations.
Consumer and private banking loans include unsecured
lines of credit, installment loans, mortgage loans and
auto loans to retail customers as well as secured lending
to high net worth individuals. Loans to banks and other
institutions represent trade-related financing and other
extensions of credit. Corporate loans represent commer-
cial and industrial loans as well as mortgage and real
estate loans to corporate customers. International
banking loans are stated at the principal amount out-
standing net of unearned income and are presented on
the balance sheet net of reserves for losses which are
discussed below.
Reserve for losses — international banking
For smaller-balance consumer loans, management
establishes reserves for incurred losses inherent in the
portfolio. Generally, these loans are written-off in full
when an impairment is determined or when the loan
becomes 120 or 180 days past due, depending on loan
type. Loans, other than smaller-balance consumer loans
(including loans impaired under SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan”),
are placed on nonperforming status when payments of
principal or interest are 90 days past due or if, in man-
agement’s opinion, the borrower is unlikely to meet its
contractual obligations. The allowance for impaired
loans is measured as the excess of the loan’s recorded
investment over either the present value of expected
principal and interest payments discounted at the loan’s
effective interest rate or, if more practical for collateral
dependent loans, the fair value of collateral. For floating
rate impaired loans, the effective interest rate is fixed
at the rate in effect at the date the impairment criteria
are met.
Other loans
Other loans primarily represent installment loans,
revolving credit due from U.S. Card Services’ customers,
loans and interest-bearing advances to airline partners.
Interest-bearing advances to airline partners will be
reduced by mileage credits purchased from these part-
ners through 2008.
Asset securitizations
The Company periodically securitizes cardmember
receivables and loans. Securitization of the Company’s
cardmember receivables and loans is accomplished
through the transfer of those assets to a trust, which in
turn issues securities that are collateralized by the trans-
ferred assets to third-party investors. The Company
accounts for its transfers of financial assets in accordance
with SFAS No. 140. In order for a securitization of
financial assets to be accounted for as a sale under
SFAS No. 140, the transferor must surrender control
over those financial assets to the extent that consider-
ation other than beneficial interests in the transferred
assets is received in exchange. Cardmember loans are
transferred to a qualifying special purpose entity, and
such transactions are structured to meet the sales criteria
of SFAS No. 140. Accordingly, when loans are sold
through securitizations, the Company removes the
loans from its Consolidated Balance Sheets and recog-
nizes both a gain on sale and the retained interests in
the securitization.
Cardmember receivables are transferred to a special
purpose entity, a trust which does not meet the require-
ments for treatment as a qualifying sale under
SFAS No. 140. Therefore, securitizations of cardmember
receivables are accounted for as secured borrowings
in accordance with SFAS No. 140.
Land, buildings and equipment
Land, buildings and equipment
Buildings and equipment, including leasehold improve-
ments, are carried at cost less accumulated depreciation.
Costs incurred during construction, as well as related
interest, are capitalized and are depreciated once an
asset is placed in service. Depreciation is generally com-
puted using the straight-line method over the estimated
useful lives of assets, which range from three to eight
years for equipment. Buildings are depreciated based
upon their estimated useful life at the acquisition date
which generally ranges from 39 to 50 years. Leasehold
improvements are depreciated using the straight-line
Notes to Consolidated
Financial Statements
AXP / AR.2005
[70 ]