American Express 2006 Annual Report Download - page 77

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[ 75 ]
notes to consolidated fi nancial statements
american express company
entity is a VIE is based on the amount and characteristics
of the entity’s equity. In general, FIN 46(R) requires an
enterprise to consolidate a VIE when it has a variable
interest and it is deemed to be the primary beneficiary
(meaning that it will absorb a majority of the VIE’s
expected losses or receive a majority of the VIE’s
expected residual return).
Qualifying Special Purpose Entities (QSPEs) under
Statement of Financial Accounting Standards (SFAS)
No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”
(SFAS No. 140), are not consolidated. The Company
utilizes QSPEs in connection with cardmember lending
securitizations within the U.S. Card Services segment.
Certain reclassifications of prior period amounts
have been made to conform to the current presentation,
including revenue and expense reclassifications contained
in the current report on Form 8-K dated April 5, 2006.
In addition, beginning prospectively as of July 1, 2006,
certain card acquisition-related costs were reclassified
from other expenses to a reduction in net card fees.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies
are translated into U.S. dollars based upon exchange
rates prevailing at the end of each year. The resulting
translation adjustments, along with any related qualifying
hedge and tax effects, are included in accumulated
other comprehensive (loss) income, a component of
shareholders’ equity. Revenues and expenses are translated
at the average month-end exchange rates during the
year. Gains and losses related to non-functional currency
transactions, including non-U.S. operations where the
functional currency is the U.S. dollar, are reported net
in other revenue or other expense, depending on the
nature of the activity, in the Company’s Consolidated
Statements of Income. Net foreign currency transaction
gains (losses) amounted to approximately $9 million, $5
million, and $(113) million in 2006, 2005, and 2004,
respectively.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the
Consolidated Financial Statements. These estimates are
based, in part, on management’s assumptions concerning
future events. Among the more significant assumptions are
those that relate to reserves for cardmember losses, asset
securitizations, and Membership Rewards, as discussed
below. These accounting estimates reflect the best
judgment of management, but actual results could differ.
NET REVENUES
The Company generates revenue from a variety of sources
including global payments, such as charge and credit
cards, travel services and investments funded by the sale
of stored value products, such as Travelers Cheques.
Discount revenue
The Company earns discount revenue from fees charged
to merchants with which the Company has entered into
card acceptance agreements for processing cardmember
transactions. The discount generally is deducted from
the payment to the merchant and recorded as discount
revenue at the time the charge is captured.
Cardmember lending finance charge revenue, net of
interest
Cardmember lending finance charges are assessed using
the average daily balance method for receivables owned.
These amounts are recognized based upon the principal
amount outstanding in accordance with the terms of
the applicable account agreement until the outstanding
balance is paid or written-off. Cardmember lending
finance charge revenue is presented net of interest
expense of $1,222 million, $868 million, and $571
million for 2006, 2005, and 2004, respectively.
Net card fees
Card fees are deferred and recognized as revenue
on a straight-line basis over the twelve-month card
membership period, net of deferred direct card
acquisition costs and a reserve for projected membership
cancellations. The carrying amount of deferred card
fees, net of direct acquisition costs and the reserves for
membership cancellations, is included in other liabilities
on the Consolidated Balance Sheet. The amounts of
each as of December 31 were as follows:
(Millions) 2006 2005
Deferred card fees $1,252 $1,176
Deferred direct acquisition costs (145) (123)
Reserves for membership cancellations (120) (124)
Deferred card fees, net of direct acquisition
costs and reserves $ 987 $ 929
Travel commissions and fees
The Company earns customer revenue by charging
a transaction or management fee for airline or other
transactions. Customer-related fees and other revenues
are recognized at the time a client books travel
arrangements. Travel suppliers pay commissions on
airline tickets issued and on sales and transaction
volumes, based on contractual agreements. These