American Express 2005 Annual Report Download - page 99

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Revenues
The Company applies a transfer pricing methodology
for the allocation of discount revenue and certain other
revenues between segments. Discount revenue is earned
by segments based on the volume of merchant business
generated by cardmembers at predetermined rates.
Within the U.S. Card Services and International Card &
Global Commercial Services segments, discount rev-
enue reflects the issuer component of the overall dis-
count rate and within the Global Network & Merchant
Services segment, discount revenue reflects the network
component of the overall discount rate. Net finance
charge revenue and net card fees are directly attributable
to the segment in which they are reported.
Expenses
Marketing, promotion, rewards and cardmember ser-
vices expenses are reflected in each segment based on
actual expenses incurred within the segment, with the
exception of brand advertising, which is reflected in the
Global Network & Merchant Services segment.
The provision for losses reflects credit-related expenses
as incurred within each segment.
Human resources and other expenses reflect expenses
incurred directly within each segment as well as
expenses related to the Company’s support services,
which are allocated to each segment based on support
service activities directly attributable to the segment.
Other overhead expenses are allocated to segments
based on each segment’s level of pretax income. Financ-
ing requirements are managed on a consolidated basis.
Funding costs are allocated to segments based on
segment funding requirements.
Capital
Each business segment is allocated capital based on
business model operating requirements, risk measures
and regulatory capital requirements. Business model
requirements include capital needed to support opera-
tions and specific balance sheet items. The risk measures
include considerations for credit, market and opera-
tional risk. Regulatory capital requirements include
the capital amounts defined for well-capitalized finan-
cial institutions.
Income taxes
Income tax provision (benefit) is allocated to each busi-
ness segment based on the effective tax rates applicable
to various businesses that comprise the segment.
Assets are those that are used or generated exclusively
by each industry segment. The adjustments and elimi-
nations required to determine the consolidated amounts
shown above consist principally of the elimination of
inter-segment amounts.
For certain income statement items that are affected by
asset securitizations and to reflect certain tax-exempt
investment income as if it had been earned on a taxable
basis at U.S. Card Services, data are provided on both
a basis consistent with GAAP as presented above, as well
as on a managed basis below. In addition, International
Card & Global Commercial Services reflects a reclassi-
fication of certain foreign exchange services as revenues
on a managed basis. Income from continuing operations
is the same under both a GAAP and managed basis. See
U.S. Card Services and International Card & Global
Commercial Services Results of Operations sections of
MD&A for managed basis discussions.
Notes to Consolidated
Financial Statements
AXP / AR.2005
[97 ]