American Express 2006 Annual Report Download - page 96

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[ 94 ]
notes to consolidated fi nancial statements
american express company
The following table summarizes the income effects of derivatives for the years ended December 31:
(Millions) 2006 2005 2004
Cash flow hedges(a):
Ineffective net (losses) gains $ (2) $3$1
Gains (losses) on forecasted transactions no longer probable to occur $6$ (2) $ 16
Reclassification of realized gains (losses) from other comprehensive (loss) income, net of tax of $85,
$23, and $(161), respectively $ 158 $ 44 $(298)
Fair value hedges(a):
Ineffective net gains $2$— $—
Net investment hedges:
Reclassification of loss from cumulative translation adjustment as a result of sales of
foreign entities $(183) $— $—
(a) There were no (losses) gains due to exclusion from the assessment of hedge effectiveness for 2006, 2005, and 2004.
The following table summarizes the net change in accumulated other comprehensive (loss) income of derivatives for
the years ended December 31:
(Millions) 2006 2005 2004
Cash flow hedges(a):
Unrealized gains, net of tax of $22, $161, and $3, respectively $42 $ 300 $ 6
Reclassification for realized (gains) losses, net of tax of $(85), $(23), and $161, respectively (158) (44) 298
Net change in accumulated other comprehensive (loss) income $(116) $ 256 $304
Net investment hedges:
Net (losses) gains related to hedges in cumulative translation adjustment $(241) $ (8) $259
Reclassification of loss from cumulative translation adjustment as a result of sales of
foreign entities 183 ——
Net change in accumulated other comprehensive (loss) income $ (58) $ (8) $259
(a) For 2005 cash flow hedge activity, the table above excludes a $19 million net increase in accumulated other comprehensive (loss) income
related to discontinued operations.
CASH FLOW HEDGES
A cash flow hedge is a derivative designated to hedge
the exposure of variable future cash flows that is
attributable to a particular risk associated with an
existing recognized asset or liability, or a forecasted
transaction. The Company uses interest rate products,
primarily interest rate swaps, to manage interest rate
risk related to the charge card business. These swaps are
used to achieve a targeted mix of fixed and floating rate
funding, as well as to protect the Company from interest
rate risk by hedging existing long-term variable-rate
debt, the rollover of short-term debt and the anticipated
forecasted issuance of additional funding. Note 8
provides additional discussion of the cash flow hedging
strategies related to short- and long-term debt. During
2006, the Company discontinued its foreign currency
risk cash flow hedge program, which related to the
forecasted purchase of investment securities by foreign
subsidiaries. The anticipated transactions were no longer
likely to occur in accordance with the original strategy.
As of December 31, 2006 and 2005, net unrealized
derivatives gains, net of tax, reflected in accumulated
other comprehensive loss were $27 million and $143
million, respectively.
At December 31, 2006, the Company expects to
reclassify $27 million of net pretax gains on derivative
instruments from accumulated other comprehensive
(loss) income to earnings during the next twelve
months. In the event that cash flow hedge accounting
is no longer applied (i.e., the Company de-designates a
derivative as a hedge, a hedge is no longer considered
to be highly effective, or the forecasted transaction
being hedged is no longer probable of occurring), the
reclassification from accumulated other comprehensive