American Express 2006 Annual Report Download - page 35

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[ 33 ]
2006 fi nancial review
american express company
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The
following chart provides information about three critical accounting policies that are important to the Consolidated
Financial Statements and that require significant management assumptions and judgments.
RESERVES FOR CARDMEMBER LOSSES
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Reserves for losses relating to
cardmember loans and receivables
represent management’s estimate of
the losses inherent in the Company’s
outstanding portfolio of loans
and receivables.
Reserves for these losses are primarily
based upon models that analyze specific
portfolio statistics, 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. Cardmember loans and receivables
are generally written off when they are
past due 180 and 360 days, respectively.
Also, to a lesser extent, these reserves
reflect management’s judgment regarding
overall reserve adequacy. Management
considers whether to adjust reserves that
are calculated by the analytic models
based on other factors, such as the level
of coverage of past-due accounts, as
well as leading economic and market
indicators, such as the unemployment
rate, the consumer confidence index, the
purchasing manager’s index, bankruptcy
filings and the legal and regulatory
environment.
To the extent historical credit experience
is not indicative of future performance,
actual loss experience could differ
significantly from management’s
judgments and expectations, resulting in
either higher or lower future provisions
for losses, as applicable.
As of December 31, 2006, an
increase in write-offs equivalent to 20
basis points of cardmember loan and
receivable balances at such date would
increase the provision for losses by
approximately $160 million.