American Express 2005 Annual Report Download - page 73

method over the lesser of the remaining term of the
leased facility or the economic life of the improvement
which ranges from 5 to 10 years.
Software development costs
The Company capitalizes certain costs associated with
the acquisition or development of internal-use software.
Once the software is ready for its intended use, these
costs are amortized on a straight-line basis over the soft-
ware’s estimated useful life of five years.
Goodwill and other intangible assets
Goodwill
Goodwill represents the excess of acquisition cost of an
acquired company over the fair value of assets acquired
and liabilities assumed. Goodwill is included in other
assets on the Consolidated Balance Sheets. The Com-
pany evaluates goodwill for impairment annually and
whenever events and circumstances make it likely that
impairment may have occurred, such as a significant
adverse change in the business climate or a decision to
sell or dispose of a reporting unit. In determining
whether impairment has occurred, the Company
generally uses a comparative market multiples approach
for calculating fair value.
Intangible assets
Intangible assets, including purchased credit card rela-
tionships, other customer relationships and other intan-
gible assets are amortized over their estimated useful
lives unless they are deemed to have indefinite useful
lives. Intangible assets are included in other assets on the
Consolidated Balance Sheets. The Company evaluates
intangible assets annually for impairment and whenever
events and circumstances make it likely that impairment
may have occurred, such as a significant adverse change
in the business climate or a decision to sell or dispose
of a reporting unit. For intangible assets subject to amor-
tization, impairment is recognized if the carrying
amount is not recoverable and the carrying amount
exceeds the fair value of the intangible asset.
Other liabilities
Membership Rewards
The Company’s Membership Rewards program allows
enrolled cardmembers to earn points that can be
redeemed for a broad range of rewards including travel,
entertainment, retail certificates and merchandise. The
Company establishes balance sheet reserves to cover the
cost of future reward redemptions for points earned to
date. The reserve for Membership Rewards is estimated
using models that analyze historical redemption statistics
since the inception of the program and reflect, to a
lesser extent, management’s judgment regarding overall
adequacy. The provision for the cost of Membership
Rewards, which is included in marketing, promotion,
rewards and cardmember services, is based upon points
earned that are expected to be ultimately redeemed by
cardmembers and the current weighted-average cost per
point of redemption. The estimated points to be
redeemed by cardmembers are based on many factors
including past redemption behavior of cardmembers,
card product type, year of program enrollment and card
spend level. Past behavior is used to estimate when
current enrollees will leave the program and their ulti-
mate redemption rate on points earned to date, but not
yet redeemed.
The liability for Membership Rewards was $3.1 billion
and $2.5 billion at December 31, 2005 and 2004,
respectively, and is included in other liabilities.
Derivative financial instruments and hedging activities
SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended, establishes
accounting and reporting requirements for derivative
financial instruments, including hedging activities.
SFAS No. 133 requires that all derivatives are recognized
on balance sheet at fair value as either assets or liabilities
in the Company’s Consolidated Balance Sheets. The fair
value of the Company’s derivative financial instruments
are determined using either market quotes or valuation
models that are based upon the net present value of esti-
mated future cash flows and incorporate current market
data inputs. The Company reports its derivative assets
and liabilities in other assets and other liabilities, respec-
tively, on a net by counterparty basis where management
believes it has the legal right of offset under enforceable
netting agreements. The accounting for the change in
the fair value of a derivative instrument depends on its
intended use and the resulting hedge designation, if any.
Cash flow hedges
For derivative financial instruments that qualify as cash
flow hedges, the effective portions of the gain or loss on
the derivatives are recorded in accumulated other
comprehensive (loss) income and reclassified into
earnings when the hedged item or transactions impact
earnings. The amount that is reclassified into earnings
is presented in the income statement with the hedged
instrument or transaction impact, generally, in net other
investment and interest income or interest expense. Any
ineffective portion of the gain or loss, as determined
by the accounting requirements, is reported as a
component of other revenue. If a hedge is de-designated
or terminated prior to maturity, the amount previously
Notes to Consolidated
Financial Statements
AXP / AR.2005
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