American Express 2006 Annual Report Download - page 81

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notes to consolidated fi nancial statements
american express company
rate in effect at the date the impairment criteria are met.
Impaired loans are returned to accrual status when all
remaining contractual principal and interest amounts
are reasonably assured of repayment.
Other loans
Other loans primarily represent installment loans,
revolving credit due from U.S. Card Services’
customers, and loans and interest-bearing advances to
airline partners.
Asset securitizations
The Company periodically securitizes cardmember
receivables and loans by transferring those assets to a
trust, which then issues securities to third-party investors
that are collateralized by the transferred assets. 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, the transferor must surrender
control over those financial assets to the extent that the
transferor receives consideration other than beneficial
interests in the transferred assets. Cardmember loans
are transferred to a QSPE, and such transactions are
structured to meet the sales criteria. Accordingly, when
loans are sold through securitizations, the Company
removes the loans from its Consolidated Balance Sheets
and recognizes both a gain on sale and the retained
interests in the securitization.
In contrast, cardmember receivables are transferred
to a special purpose entity, a trust that does not meet
the requirements for treatment as a qualifying sale.
Therefore, securitizations of cardmember receivables are
accounted for as secured borrowings.
Land, buildings and equipment
Land, buildings and equipment
Buildings and equipment, including leasehold
improvements, 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 computed 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 40 to
60 years.
Leasehold improvements are depreciated using the
straight-line method over the lesser of the remaining
term of the leased facility or the economic life of the
improvement, which ranges from five to ten years.
The Company maintains operating leases
worldwide for facilities and equipment. Rent expense
for facility leases is recognized ratably over the lease
term, and is calculated to include adjustments for rent
concessions, all known rent escalations, and leasehold
improvement allowances.
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
software’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 Company evaluates goodwill for impairment
annually and whenever events and circumstances make
it possible that impairment may have occurred, such as a
significant adverse change in the business environment
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, primarily customer relationships, are
amortized over their estimated useful lives on a straight-
line basis, unless they are deemed to have indefinite
useful lives. Intangible assets are included in other assets
on the Consolidated Balance Sheets. The Company
reviews intangible assets for impairment quarterly. In
addition, the Company fully evaluates intangible assets
annually and whenever events and circumstances make
it possible that impairment may have occurred, such as a
significant adverse change in the business environment
or a decision to sell or dispose of a reporting unit. For
intangible assets subject to amortization, impairment is
recognized if the carrying amount is not recoverable and
exceeds the asset’s fair value.
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